For example, the market has been in an uptrend and when price hits a major resistance level, it reversed and formed a downtrend. Now where can reversals happen? Well, in simple terms, continuation means that there is a main trend, for example an uptrend, that is happening… and you will notice that price slows down and maybe consolidates for a little while and may fall back down a little…it is like a minor downtrend in a major uptrend move called a downswing in an a major uptrend.
So when that ends and price resumes in the original uptrend direction then that is called a continuation. The chart below makes this concept a bit more clearer. So the big question is: how to spot trend continuity and execute trades at the right time? The secret is in identification of specific chart patterns as well as very specific candlesticks patterns and you will discover more on the Chart Patterns and Candlestick Patterns section of this course. A price swing is when markets moves like what a wave does.
This is especially true if your style of trading is trend trading or swing trading. You will execute trades at the very wrong spot! For example, in a downtrend, you will sell when the market is just doing an upswing! Not good! Which means, you will get stopped out or you need to put in a large stop loss. Large stop loss does not necessarily mean large risk if you do position sizing based on the stop loss distance. So in an uptrend, you should be looking to buy on the downswing.
In a downtrend, you should be looking to sell on an upswing. These levels stand out and are so easy for everyone to see! Because they are so obvious. As a matter of fact, support and resistance trading is the core of price action trading. The key to successful price action trading lies in finding effective support and resistance levels on your charts. Now, in here, I talk about 3 types of support and resistance levels and they are: 1. The normal horizontal support and resistance levels that you are probably most familiar about.
Broken support levels become resistance levels and broken resistance levels become support levels. Horizontal Support and Resistance Levels These are fairly easy to spot on your charts.
They look like peaks and troughs. The chart below is an example and shows you to trade them. So when price heads back to that support or resistance level, you should expect that it will get rejected from that level again.
The use of reversal candlestick trading on support and resistance levels becomes very handy in these cases. If you really want to take trades that have high potential for success, you should focus on identifying significant support and resistance levels on your charts.
And when price reacts to these levels, they usually tend to move for a very long time. This is so that I can get in at a much better price level as well as reducing my stop loss distance.
Here is an example shown on the chart below: So when you see such happening, you should be looking for bearish reversal candlestick to go short. Can you see how the need for using other indicatorsis diminished once you understand how easy is to spot such trading setups like these? This section is about that.
The path price follows and the area enclosed within it is called the price channel. The fundamental principle of how a channel form is based on support and resistance. There are 3 major types of channels: 1. Look for reversal candlesticks to buy or sell when you see such setups happening. If you buy or sell on the other side of the channel, you wait for price to reach the other end of the channel to take profit or exit the trade.
Place your stop loss on just outside the channel or just above the high of the candlestick for a sell order or just below the low of the candlestick for a buy order that touched the channel and shows signs of rejection. This candlestick can also be a reversal candlestick. You may also decide to take half the profits off as price is in the middle of the channel for a profitable trade.
Not knowing what chart patterns are forming can be a costly mistake. If you are like that, this is your opportunity to get back on track. Why costly mistake? Because you are completely unaware of what is forming on the charts and you end up taking a trade that is not in line with what the chart pattern is signalling or telling you! These are the 9 chart patterns you will learn about today: 1. Triangle chart patterns-symmetrical, ascending and descending 3 patterns 2.
Head and shoulders and Inverse Head and Shoulders 2 patterns 3. Double Bottom and Double Top 2 patterns 4. Tripple Bottom and Tripple Top 2 patterns But first up, I am going to talk about triangle chart patterns.
Symmetrical Triangle There are 3 types of triangle chart patterns and the chart below shows the differences between each very clearly: Now, lets starts with the symmetrical triangle pattern first. The Symmetrical triangle chart pattern is a continuation pattern therefore it can be both a bullish or bearish pattern. What does this mean then? Well, if you see this pattern in an uptrend, expect a breakout to the upside.
I then switch to the 1hr chart to wait for the breakout to happen. This is what tends to happened with such long breakout candlesticks. So if you entered a buy order using that long breakout candlestick above, you would have to wait a while for your trade to turn profitable.
Stop loss Placement Options. Here are 3 ways on how to place stop loss on triangle patterns, which include symmetrical, ascending and descending triangle patterns which you will learn next. The stop loss placement techniques here are applicable to all triangle patterns so take note of that. It is considered a bullish continuation pattern in an existing uptrend. So when you see this forming in an uptrend, expect a breakout to the upside.
However, it can also be a strong reversal signal bullish when you see it form in a downtrend. Stop Loss Placement Options You can use the strategies given in symmetrical triangle.
Take Profit Options I prefer to target previous resistance levels as my take profit target. That should give you your profit target level s.
It is a bearish chart pattern that forms in a downtrend as a continuation pattern. However, this pattern can also form as a bearish reversal pattern at the end of an uptrend. How to Trade The Descending Triangle Formation Similar to the other 2 triangle patterns, you can either trade the initial breakout or wait to see if price reverses back to test the broken support level and then sell.
This helps to reduce false breakout signals. But there will be times when I will just trade the breakout with a pending sell stop order just a few pips under the support level to catch the breakout when it happens but when I do that, I sit and watch the close of the 1hr candlestick to make sure that it does not close above the support line if that happens, it may mean a false breakout.
How To Take Profit I prefer to use previous support levels, lows or troughs and use those as my take profit target level. This last top is considered the right shoulder. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. The following chart below makes it much clearer.
The inverse head and shoulder pattern is bullish reversal candlestick pattern and just the opposite of head and shoulders pattern. Use bullish reversal candlesticks for trade entry confirmation if you are waiting to buy on re-test. I often tend to place my profit target on previous highs.
One method of calculating profit target is to measure from the head up to the trendline and what the distance in pips is your profit target. See the two blue vertical lines in the chart above.
Double Bottom Chart Pattern A double bottom chart pattern is bullish reversal chart pattern and when it forms in an existing downtrend, it signals a possible upward trend. Once it hits that neckline level they buy. In this way, you have the potential to ride the trade all the way up if the neckline is intercepted. You should consider buying on bottom 2 as buying on a support level…as a matter of fact, that it what is is!
Look for bullish reversal candlestick patterns for trade entry signals. Double Top Chart Pattern A double top chart pattern is a bearish reversal chart pattern and when found in an uptrend and once the neckline is broken, that confirms a downtrend. The double tops are very powerful patterns and if you get into a trade at the right time, you stand to make a lot of profits when the breakout happens to the downside.
And if price moves down and intersects the neckline and continues to do down further, your profits are dramatically increased. Use previous low support levels to set take profit targets. Or another option would be to measure the distance between the neckline and the highest peak the range and use that difference in pips as take profit target if you are trading the breakout from the neckline.
If I see a bullish reversal candlestick pattern, I buy. Why do I do that? Well, if price goes up and breaks the neckline and goes upward, I would be in a lot more profit than if I bought the breakout of the neckline. The Triple Top Chart Pattern Triple tops are the opposite of triple bottoms and they are bearish chart patterns.
They rarely occur but its good to know what they look like. Triple tops when found in an uptrend, it signals the end of the uptrend when the neckline is broken and price heads down. These are your signals to go short.
Or you can use a previous low and use that as your take profit target level as well. Because there are very popular are really powerful so why waste time with the rest? When these candlesticks form at support and resistance levels or Fibonacci levels they are great trade entry signals.
The doji candlesticks are single individual candlestick patterns. There are 4 types of doji candlesticks as shown below: a The doji cross can be both considered a bullish or bearish signal depending on where it forms. For a bullish engulfing pattern, you will see that the first candle is bearish followed by the second candle which is very bullish and this 2nd candle completely engulfs a Bullish Engulfing-when formed in a support level or in a downtrend, this can signal that the downtrend is potentially ending.
The harami is a 2 candlestick pattern and can be bullish or bearish. The first candlestick is a very bearish candlestick followed by a bullish candle, which is quite short and is completely covered by the shadow of first candle. When you see this in a downtrend or in an area of support, this will be your bullish buy signal.
When you see this pattern form in a resistance level or in an uptrend, this is a bearish reversal signal and may indicate that the uptrend is ending and you should go short sell.
The first one is a bullish candlestick showing a strong upward momentum but when the second candle forms, it shows a completely different story…its bearish and it closes at about the mindway point of the first candlestick. You may see this in a downtrend or forming at a support level.
This tells you that the bears are losing steam and that the bulls are gaining strength to potentially move the market price up. The second bullish candlestick should close somewhere up the mind-point of the first candlestick. So when you see the piercing line pattern forming at support levels or in a downtrend market, take note as this is a potential bullish reversal signal so you should be thinking of going long buying.
The shooting star is single candlestick pattern and when it forms in an uptrend or in a resistance level, then it is considered as a bearish reversal pattern and so you should be looking to sell. Note: the shooting star is sometimes called the bearish hammer, inverse hammer, inverted hammer or bearish pin bar.
They all mean the same and refer to the shooting star candlestick pattern. It has a very long tail and a short upper wick or none at all. When it forms in a downtrend or at support levels, you should take note…this is a very high probability bullish reversal candlestick pattern and you should be looking to go long buy.
Is it still a bullish signal? Well, in that case, this candlestick is a hanging man and its not a bullish signal. When it forms in an uptrend or in resistance levels, it tells you that there is a possibility that the uptrend is ending so you should be looking to go short sell. This tells you that bulls are losing ground and bears have gained controlled. So when you see the bearish railway track pattern in an uptrend, or in an area of resistance, this is a signal that the downtrend may be starting so you should be looking to sell.
When you see this in a downtred or in an area of support, take note because the market may be heading up and this is your signal to buy. Spinning tops have small bodies with upper and lower shadows that exceed the length of the body. Spinning tops signal indecision. A spinning top is a single candlestick pattern and it can be both bullish or bearish.
Similarly, a bullish spinning stop in a resistance level or in an uptrend can be considered a bearish signal as soon as the low is broken to the downside.
Example below shows what I mean: Spinning tops are faily short in length commpared to other candlesticks and their body length is a few steps wider than that of doji candlesticks which actually have none or very tiny bodies. Another notebale feauture of spinning tops is that the wicks on both sides should be almost the same length. When I see spinning tops form on support or resitance levels, all it tells me the bears and bulls do not really know where to push the market and so when a breakout of the low or high of a spinning top by the next candle that forms usually signals the move in that direction of breakout!
So what do you think the candlestick pattern would be in the two minute candlesticks to give you a bullish hammer candlestick pattern in the 1hr timeframe? Or if you see a shooting start bearish candlestick in the 1hr timeframe, what do you think would be the candlestick pattern in the two- 30minute candlesticks that gave that 1hr candlestick a shooting star?
Similarly, there is no 2hr timeframe to go with 4hr timeframe and no 8hr timeframe to go with the existing 4hr timeframe. But unfortunately, no hammer forms in the 1hr timeframe and even though you see a bullish engulfing pattern formed, you did not enter a buy trade.
You just watched as price shoots up and you wished you could have bought at the bullish engulfing signal that was given but you are only interested in trading hammers.
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