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  • Introduction to Candlestick Patterns

What is a Japanese Candlestick

A Japanese Candlestick is basically a way to interpret your charts.

Candlestick isn’t the only way.

You also have the line chart, bar chart, and Renko charts.

Candlesticks are just one type of method that you can use!

It’s very popular because it reveals quite a bit of information on the chart.

Where did Candlesticks originate

Candlesticks originated from Japan from a Japanese rice trader called Munehisa Homma from Japan

It was brought to the western world by Steve Nison.

He wrote the famous book called “Japanese Candlestick Charting Techniques.”

This is how the western side of things get to know about Japanese candlestick.

How to read a Candlestick

If you look at a Japanese candlestick, you will only see two types of bars:

  • Bullish Bar
  • Bearish Bar

Let me explain…

Bullish Bar

If you look at a Japanese candlestick and you see a bullish bar:

All you need to know is that the open is at the bottom.

Then, the price moves up higher and eventually close at the top.

Above the close is the high of the candle referencing a particular point in time.

Below the open is the lowest point referencing a particular point in time.

What do I mean by a particular point in time?

This means that the high and low is determined by the type of candlestick you’re looking at.

Let’s say your candlestick is based on a daily chart, then the highs and lows represent one day.

If your candlestick is an hourly chart, then the highs and lows represent one hour.

This is how you read a bullish candlestick chart!

Bearish Bar

A bearish one is just the opposite for the open and close, but the highs and lows remain the same.

A bearish one is just the opposite for the open and close:

If you think about this, for a candle to bearish, it has to close lower.

For it to close lower, the open has to be at the top and then eventually close lower.

Again, the high and low depends on the timeframe you’re looking at.

Let’s have a look at an actual chart:

This is the FOREX market chart EUR/USD.

And you can see that this is a daily timeframe.

Each candlestick in this chart represents the high for the day and the low of the day.

A bearish candle, as you can see, has a red colored body.

A bullish one basically has a green color body.

With that said, let’s do a quick recap…

Recap

  • In a bullish candle, the open is below the close.
  • For the bearish candle, the open is above the close.
  • The wick basically represents the high or low for a given period.
  • The Limitations of Candlestick Patterns

Limitations using Japanese Candlesticks

First and foremost, understand that this is not the Holy Grail…

There is no Holy Grail in trading!

Japanese candlestick is just a technique for you, or rather a tool that you can use in your trading to help you make better trading decisions.

That’s about it.

It’s not a Holy Grail.

It is not a trading system by in itself.

Okay?

So, with that said I want to share with you three limitations of candlestick chart:

  • It doesn’t tell you how the price move.
  • It doesn’t tell you the big picture.
  • Gap

Let me explain what I mean…

How the price moved

Let’s say you have a bullish candlestick chart on the daily.

It opens, and it closes higher.

The thing about this is that it doesn’t tell you how the price moved within the day!

Maybe the price moved up, moved down, consolidates, and close somewhere during the day.

Here’s what I mean:

You can see that there are three different ways that I have come up with on how the price could potentially move!

Of course, there are more than three ways, most likely countless possibilities!

But a candlestick will not tell you that.

The “big picture”

A lot of times, traders look at candlestick patterns like the shooting star! bullish hammer! and stuff like that…

But looking at this pattern itself, it does not tell you the big picture.

If you’re not careful and if you just treat these patterns in isolation, it can be disastrous.

So, the thing is, if you look at a bearish pattern and go short, then you know you’re going to be in for some trouble.

Because you always have to take into consideration what is the prevailing trend.

And this is something that no candlestick pattern will tell you.

It will tell you what has happened momentarily, but it doesn’t tell you what is the long-term trend.

So, bear this in mind…

That candlestick patterns just tells you what happened momentarily at one particular point in time.

It does not tell you anything else outside of that.

With that said…

That is the second limitation, the big picture.

And the third thing is…

Gap

Traditionally, candlestick pattern comes with a gap.

For example, engulfing pattern the pattern has to gap.

It has to gap above and below the prior candle.

Here’s what I mean:

 

If you don’t understand don’t worry.

We’ll cover that later…

Just understand that traditionally, candlestick patterns come with a gap.

So, if you’re trading markets like the Forex market which is open 24/5

You hardly have gaps, because it’s open for almost 24 hours a day!

What happens is that you have to remove a gap portion according to the textbooks.

And slightly tweak the definition of bearish engulfing for the Forex market.

With that said, let do a quick recap into the limits of candlestick pattern…

Recap

  • It doesn’t tell you how the price move.
  • It doesn’t tell you what’s the long-term trend.
  • You need to modify patterns that involve a gap, especially if you’re trading 24 hours market like the FX market and even some in the futures market.
  • What is a Bullish Engulfing Pattern

What is a Bullish Engulfing Pattern

In this video, you’ll learn about the Bullish Engulfing pattern.

Let me share with you what it looks like:

Let me explain to you the concept behind it.

You can see that when the first candle opens, the sellers came in and took control and pushed price all the way down lower, closing near the lows.

What happened next, is that the subsequent candle opened near the lows.

The buyers stepped in and pushed price all the way back higher.

Even higher than the previous day highs.

And then finally closing near the highs.

You can see that this a Bullish Engulfing pattern.

Because it has “engulfed” the previous candle.

This is a bullish reversal pattern, a bullish engulfing pattern.

One thing to note is that, the larger the bullish engulfing pattern, the more significant it is!

Right now…

I’m just going to walk you through and share with you an example:

You can see over here, this is the EUR/USD Chart.

You can see that the candle opened near the lows, and then closed above the previous candle open.

To me, my definition of a bullish engulfing is that the candle has to be larger than the body of the previous candle.

I hope you have an idea of how it is.

Remember, never ever treat candlestick patterns in isolation.

This means that if you see a bullish engulfing pattern on your chart, don’t just blindly go long.

This is not enough.

It doesn’t give you an edge in the markets.

With that said, here’s a quick recap…

Recap

  • A bullish engulfing pattern is a bullish reversal pattern.
  • Buyers are momentarily in control.
  • The larger it is, the more significant the pattern is.
  • What is a Bearish Engulfing Pattern

What is a Bearish Engulfing Pattern

In this video, we will be discussing the Bearish engulfing pattern.

Let me walk you through…

Here’s what it looks like:

In the first candle, you can see that price has opened near the lows.

The buyers stepped in and pushed prices all the way up and closed towards the highs.

Then, the subsequent candle that has opened where it closed previously…

The sellers came in and took price all the way down lower.

Finally closing near the lows!

This is a bearish engulfing pattern because the second candle has engulfed the previous green candle.

What it means is that it’s a bearish reversal pattern.

The sellers are momentarily in control.

The key word is „momentary,” I didn’t say permanently.

The larger it is the more significant the pattern is.

Just to walk you through a few examples:

You can see that there are three bearish engulfing, where it opened and then closes near the lows.

Then the body of the subsequent candle is definitely larger and overcame the body of the previous candle.

So, by now I hope you have a good idea of what a bearish engulfing pattern looks like!

With that said, let’s do a quick recap…

Recap

  • A bearish engulfing pattern is a bearish reversal pattern.
  • Sellers are momentarily in control.
  • The larger it is, the more significant the pattern is.
  • Don’t treat this pattern in isolation. Just because you see a bearish engulfing pattern doesn’t mean you go short.
  • What is a Piercing Pattern

What is a Piercing Pattern

In this video, we will be discussing the piercing pattern.

Here’s what it looks like:

In the first candle, you can see that the sellers are in control.

The market opened at the highs, and the sellers came and pushed price all the way down lower.

And eventually, it closed somewhere near the lows.

The first candle is bearish as the sellers have pushed price lower.

Where the piercing pattern comes into play is on this second candle where the market opened near the lows.

And the buyers push the price higher, and it closes somewhere near the highs of the bullish candle.

One thing to note is that the piercing pattern is actually a variation of the engulfing pattern.

In fact, I would say the piercing pattern is not as strong as the engulfing pattern.

Because if you think about this…

The engulfing pattern that you’ve learned earlier, the candle has closed above the open of the first candle.

Whereas the piercing pattern only closes two-thirds of the first candle!

This is still a bullish reversal candle, but it’s not as strong as the engulfing pattern.

It’s a bullish reversal pattern, but it’s secondary the bullish engulfing pattern.

Buyers are momentarily in control.

The larger it is, the more significant the pattern is.

The larger it is, it would become a bullish engulfing already.

Let’s have a look at a few of these examples:

Notice that the candle has closed at the upper echelon of the previous candle.

I would say that the way to define whether it’s a piercing pattern or not is that it has to close at least half of the previous candle close above the halfway mark of the previous candle.

Now that you know what it looks like, let’s do a quick recap…

Recap

  • A piercing pattern is a bullish reversal pattern, but it’s secondary to the bullish engulfing, because it tends to be smaller in size, and it doesn’t close above the previous candle.
  • Buyers are momentarily in control.
  • The larger the pattern is the more significant it becomes.
  • The most important thing is that you don’t trade these candlestick patterns in isolation.
  • What is a Dark Cloud Cover

What is a Dark cloud cover

In this video, I’ll be discussing the dark cloud cover.

It sounds like a nice name, right?

Here’s what it looks like:

Let me explain…

The first candle is a bullish candle.

Buyers stepped in, push all the way up higher, and finally closing near the highs!

Then what happens is that the sellers came in, and pushed price lower all the way back down towards the low of the candle.

The dark cloud cover is basically when the second candle has closed below the 50% mark of the first candle.

It differs from the bearish engulfing pattern.

Because the bearish engulfing pattern would close beyond the open of the first candle.

Meaning that the bearish engulfing pattern’s second candle will close below the first candle totally.

Dark cloud cover is a bearish reversal pattern.

Sellers are momentarily in control, and the larger it is the more significant it becomes.

And in fact, the larger it is, it will become a bearish engulfing!

Have a look at a few examples:

Notice it didn’t close beyond the lows or the open of this candle.

But it has closed beyond the 50% mark.

This is considered a dark cloud cover.

With that said, let’s do a quick recap…

Recap

  • A dark cloud cover is a bearish reversal pattern, but it’s secondary to the bearish engulfing.
  • Sellers are momentarily in control. That’s what this candlestick pattern represents.
  • The larger it is, the more significant it becomes.
  • Don’t trade it in isolation.
  • What is a Hammer

What is a Hammer Candlestick Pattern

So, in this video, we will be discussing Hammer.

It’s hammer time!

Anyway, Hammer looks something like this:

Let me walk you through how it works.

Basically, for a Hammer candlestick pattern, the price opens at a high level.

Then the sellers quickly came in and took control and you can see that the price is being pushed all the way down lower.

What happens is that the buyers (the bulls) came in and has taken control back from the sellers, pushing price all the way back up higher.

And finally, closing near the highs of the day.

This candlestick pattern is essentially telling you that there is a tug of war between the bulls and the bears.

And eventually the bulls have won, right?

So, essentially this candlestick pattern is a bullish reversal pattern.

Buyers are momentarily in control.

Ideally, the length of the wick is at least two times the body!

The longer the wick, the greater the price rejection.

So, how you want to define Hammer is that the body is small.

Let me point out to you few a Hammers that you can see on this chart over here:

One thing to clarify is that you might have come across in works or materials online that says that If you spot a Hammer in the uptrend…

It’s a sign of weakness, that sellers are stepping in.

For this, I can’t agree…

Because when you see a Hammer in an uptrend, to me that is a sign of strength.

Because it tells you that there are sellers coming in.

But, eventually the sellers are overrun by the buyers, and prices now close bullishly higher.

With that said, let’s do a quick recap of what a Hammer is…

Recap

  • A Hammer is basically a bullish reversal pattern, telling you that the buyers are momentarily in control.
  • The length of the wick ideally needs to be at least two times the length of the body. And needless to say, if the wick is much longer than the body, that’s created a price rejection.
  • And last but not least, don’t trade it in isolation.
  • What is a Shooting Star

What is a Shooting Star Candlestick Pattern

In this video, I’ll be discussing the Shooting Star.

So, the Shooting Star looks something like this:

It’s basically the opposite of a hammer.

You can see that the buyers came in and pushed price all the way up higher.

And then the sellers came in and reversed all the gains made by the buyers.

Eventually closing near the lows.

Based on the visualization that you’ve seen…

It’s quite straightforward to know that this Candlestick pattern is a bearish reversal pattern.

Sellers are momentarily in control.

The length of the wick, ideally, is at least two times the length of the body.

And, the longer the wick, the greater the price rejection.

So, in this example, let me share with you a Shooting Star:

Another thing to note is that when you see a downtrend.

And then you spot somewhat of a Shooting star.

This only serves to reinforce that the sellers are still in control!

Don’t think that it is a bullish pattern in a downtrend just because you see a long wick where it shows that the buyers have stepped in previously.

Because eventually, the buyers will exhaust themselves and the sellers came in and took control.

Let’s do a quick recap…

Recap

  • A Shooting star is a bearish reversal pattern.
  • It tells you that momentarily the sellers are in control.
  • Length of the wick to be at least two times the body. The longer the wick, the greater the price rejection.
  • Just because it’s a bearish reversal pattern doesn’t mean you trade it in isolation.

The key thing I’m trying to bring across is, understand what this individual Candlestick Pattern mean.

And afterward, you can use these tools and techniques that you’ve learned and make it as part of your training plan when you consider the different elements in your training.

  • What is a Shooting Star

What is a Shooting Star Candlestick Pattern

In this video, I’ll be discussing the Shooting Star.

So, the Shooting Star looks something like this:

It’s basically the opposite of a hammer.

You can see that the buyers came in and pushed price all the way up higher.

And then the sellers came in and reversed all the gains made by the buyers.

Eventually closing near the lows.

Based on the visualization that you’ve seen…

It’s quite straightforward to know that this Candlestick pattern is a bearish reversal pattern.

Sellers are momentarily in control.

The length of the wick, ideally, is at least two times the length of the body.

And, the longer the wick, the greater the price rejection.

So, in this example, let me share with you a Shooting Star:

Another thing to note is that when you see a downtrend.

And then you spot somewhat of a Shooting star.

This only serves to reinforce that the sellers are still in control!

Don’t think that it is a bullish pattern in a downtrend just because you see a long wick where it shows that the buyers have stepped in previously.

Because eventually, the buyers will exhaust themselves and the sellers came in and took control.

Let’s do a quick recap…

Recap

  • A Shooting star is a bearish reversal pattern.
  • It tells you that momentarily the sellers are in control.
  • Length of the wick to be at least two times the body. The longer the wick, the greater the price rejection.
  • Just because it’s a bearish reversal pattern doesn’t mean you trade it in isolation.

The key thing I’m trying to bring across is, understand what this individual Candlestick Pattern mean.

And afterward, you can use these tools and techniques that you’ve learned and make it as part of your training plan when you consider the different elements in your training.

  • What is a Doji

What is a Doji Candlestick Pattern

In this video, I’ll be explaining to you what is a Doji!

So, a Doji looks something like this:

There are different variations to it but I’ll explain to you what is the technical definition of a Doji.

A Doji basically means that the open and the close are at the same price level.

This is why you don’t see any colored body on this candlestick pattern.

To read the price action of the Doji, the key thing to look at is the wick to show you how strong the price rejection is.

Because if you have a Doji that has an equal upper and lower wick, it’s telling you that the buyers and sellers are pretty much in equilibrium.

With that said, there are variations of this pattern:

  • Gravestone Doji
  • Dragonfly

I’ll explain…

Gravestone Doji

This one over here is telling you that the sellers are in control because it has pushed price lower from the highs all the way to the closing where it last opened.

A Gravestone Doji looks something like this:

Dragonfly Doji

A Dragonfly Doji is something like this:

It’s the opposite of the gravestone where you have a very strong price rejection of lower prices!

And the price closes back where it opened.

With that said, let’s have a look at some Doji on this chart:

You can see that the price has actually opened and closed at the same level but you can see that it rejected lower prices.

I’m not really a fan of going straight that will lead to the technical definition.

I think what’s more important is the context of the candlestick pattern.

There’s really no need to memorize the exact pattern if you can understand what the market is trying to tell you.

Okay, so let’s do a quick recap…

Recap

  • Doji basically tells you that the candlestick pattern has opened and closed at the same price. But with a marginal close, you can consider them as a Doji.
  • There are definitely variations of it. Dragonfly Doji, which tells you bullish price rejection. And the gravestone Doji, which is more of a bearish price rejection.
  • The longer the wick the greater the price rejection.
  • What is a Harami

What is a Harami Candlestick Pattern

In this video, I’ll be discussing the Harami.

This is what it looks like:

This candle over here, the second one, is a Harami.

A Harami is simply what I call an inside bar.

This means that the candle is inside the prior candle.

It’s actually the opposite of the engulfing pattern actually.

Usually, when you see Harami on your chart, it usually leads to volatility expansion.

It does not expand immediately but it should be like a signal to you that the volatility of the market is contracting.

As you know, volatility in the market is not constant.

It moves from volatility contraction to expansion, and then back to contraction, and then expansion again!

Let’s have a look at Harami on this chart:

You can see that volatility is contracting, and then it expanded towards the downside.

By now, I think you should be familiar with what is a Harami and the implication of this is that it is telling you that the market is going through, or possibly going through a volatility contraction.

And you can expect volatility to expand or pick up if the price doesn’t break out of any significant level.

Here’s a quick recap to the Harami…

Recap

  • It’s basically an inside bar with a small range, and sometimes it can be large, as you have seen earlier.
  • Usually, it’s a sign that the market could be going through a volatility contraction, and you would tend to expect volatility to expand in the near future.
  • It expands or breakout in the direction of the prevailing trend, or rather the previous momentum that led to the volatility contraction
  • What is a Morning Star

What is a Morning Star Candlestick Pattern

In this video, I’ll be discussing the morning star.

So, let’s have a look:

A morning star basically is a three-candle pattern.

Notice that there are three candles.

What you have is the first bearish candle where the sellers are in control and it pushed price all the way down closing near the lows.

What happened in the second candle is interesting, because usually when you get a strong-bodied candle, chances are the mixed candle tend to continue to move.

So, what happened is that the second candle didn’t continue to the downside.

Instead, what you have is a Doji!

It tells you that both the buyers and the sellers are in equilibrium.

The third candle kind of seals the deal where the buyers step in and push price all the way higher and finally closing near the highs.

With that said, you should already have a good idea that it’s actually a bullish reversal pattern.

Buyers are momentarily in control.

And the larger it is, the more significant the pattern is.

One thing I want to point out is that…

Whatever the candlestick pattern that you come across, you always have to be prepared that there are many variations to it.

What I’ve just shared with you in this candlestick series training video is the ideal textbook pattern.

But when it comes to the real world, it may not look like the textbook pattern.

So, it’s important to understand what the candlestick patterns are telling you.

This is why I always go through this visual explanation of who’s in control, what’s happening, what’s going on.

Similarly, the morning star is that sellers are in control.

They have a Doji, telling you that buyers and sellers are in equilibrium.

And then finally, the buyers took control and closed price and closed near the highs of the candle.

With that said, let’s have a look at some example:

Ideally, the best pattern is where the bullish (third) candle closes above these highs of the first candle.

However, you have to take things into context.

You cannot memorize patterns because if you do that…

You will always get thrown off guard whenever the market presents a variation of whatever candlestick pattern that you have memorized.

Just a quick recap of what you have learned in this video…

Recap

  • The morning star is a bullish reversal pattern.
  • Buyers are momentarily in control. As you noticed, the third candle is where the buyers stepped in and pushed price higher.
  • The larger it is, right, the more significant this reversal pattern will be.
  • What is an Evening Star

What is an Evening Star Candlestick Pattern

In this video, I’ll be discussing the Evening star, which is just essentially the opposite of the Morning Star:

Over here, you can see that the first candle is bullish.

Buyers push price all the way up higher and closing near the highs.

And the second candle is where things get interesting because instead of following through towards the upside.

You notice that you have an indecision candle.

Telling you that both the buyers and sellers are in equilibrium!

And the third candle kind of seals the deal as the sellers came in and took control, and finally now closing the price near the lows of this candle.

So, just quick a trivia for you…

If you just look at the third candle in isolation, it is a bearish engulfing candle.

Because, if you look at the second and third candle in isolation, you notice that this is a bearish engulfing, as it has engulfed the body of the prior candle.

So, you can see that this three-candle pattern, the Evening Star, and even the Morning Star.

Are basically taking the similar concepts that you have learned in the earlier lesson.

And applying it into this lesson that you are seeing right now.

Okay?

So, let’s have a look at a few examples on a chart:

As you can see, there can be variations to it.

It’s important to understand what the price is telling you instead of memorizing candlestick pattern.

It’s very rare you’ll actually see a textbook example.

Okay, just a quick recap…

Recap

  • The Evening Star is a bearish reversal pattern. A three-candle reversal pattern.
  • Sellers are momentarily in control.
  • The larger this pattern is, the more significant the reversal will be.
  • Do not treat this pattern, or any candlestick pattern, in isolation.

Don’t worry about how to trade it.

Because in the later videos, I will teach you how to treat candlestick patterns the correct way.

So, with that, I have come to the end of this video and I’ll see you in the next

  • How to Combine Candlestick Patterns

How to combine candlestick patterns

In this video, I will share with you on how you can actually combine candlestick patterns to form a pattern on the higher timeframe.

What happens is that you can actually take multiple candlesticks together, combine them, and it can become another candlestick pattern on the higher timeframe.

And why would you want to do that?

Because sometimes it can actually provide clarity to what the market is doing.

Let me explain…

Looking at this diagram, let’s say, that two of the first candle in the left is a 1-hour time frame candle.

If you take the two 1-hour candles (bearish engulfing).

Combine them together…

And what you’re going to get is a shooting star or a bearish pin bar in the 2-hour timeframe.

Just to illustrate again…

Let’s say, that two of the first candle in the left is a 1-hour time frame candle.

If you take the two 1-hour candles (bullish engulfing), combine them together, and what you’re going to get is a shooting star or a bullish pin bar in the 2-hour timeframe.

When you combine two candlestick patterns, it can form another one, which gives you clarity to what is going on in the markets.

And it is clearly telling you that the buyers are in control.

So just a quick recap…

Recap

  • You can combine different candlestick patterns to form a higher timeframe pattern.
  • The reason why you might want to do this is it helps to provide clarity.
  • How to Read Candlestick Patterns like a Pro

Three things you must know

This is possibly one of the most important videos of this candlestick training series.

Because up to this point…

You have learned the different types of candlestick patterns.

But to be honest, you don’t really need to memorize any candlestick pattern!

As long as you understand these three things that I’m about to share with you.

Once you understand the three things, you can forget about all the candlestick patterns that you have learned earlier.

Because you can still read what the market is trying to tell you.

This is powerful stuff.

With that, the first thing that you must know is…

1. The body

The length of the body shows you who’s in control.

If you have a longer body, let’s say, a bigger bullish candle with a larger body…

It’s telling you that the buyers are, obviously, in control!

The second thing is…

2. The length of the wick

The length of the wick shows you price rejection.

Where the price get rejected at the highs, where they get rejected at the lows.

The third thing you have to look at is…

3. The ratio of the wick to the body

You need to know the ratio of the wick to the bod to get the complete picture.

Let’s have a look at this illustration…

We can see over here the first candle you have a strong body close, buyers are in control.

If you look at the wick of the candle, It’s relatively short so there isn’t really much price rejection.

This one you can state that for the candlestick that you see on the first candle, the buyers are in control.

The second candle has a small body.

So, the buyers are not really in control.

The wick got rejected near the highs and the lows.

It’s telling you that it’s somewhat undecided because the length of the wick is pretty much proportionate to one another!

The third candle has closed higher, the buyers are in control.

The length of the wick is a very long wick, rejecting lower prices.

So, it’s telling you that this candle shows that buyers are in control and has rejected lower prices.

This is a very strong price rejection because if you look at the wick relative to the body the wick is so much longer than the body.

Moving on…

You can see that this is just the opposite example.

On the first candle, you have a very small wick and a very large body candle towards the downside, sellers are in control.

The second candle, again, you can see that the price rejection of these highs and these lows are somewhat proportionate.

So, it’s more of an indecision candle as the buyers and sellers are pretty much similar to one another.

The third one is more bearish.

As you can see, you have a body that is a lower close and not a very large body.

But it doesn’t matter because you notice that this long wick that has rejected.

On top of it, the length of the wick relative to the body is so much longer.

As it tells you that it has rejected all these higher prices.

Finally, closing near the lows!

With that said, here’s a recap…

Recap

  • Length of the body shows who is in control.
  • The length of the wick shows you the price rejection.
  • To get a complete picture you want to look at the ratio of the wick to the body to get the complete picture.
  • he Wrong Way to Trade Candlestick Patterns

How NOT to trade Candlestick Patterns

In this video, we will be discussing how not to trade candlestick patterns:

The first thing is…

1. Don’t trade it in isolation

This is something that I have been grinding to you since I think the first few videos!

Don’t trade it in isolation.

Why?

Because if you see a bullish hammer, you go long.

You see a shooting star, you go short.

Chances are you’re not going to make money in the long run.

Because it does not have a statistical edge in the markets.

The second thing is…

2. Candlestick patterns by and itself is not a trading strategy

If you think back, what is a trading strategy?

A trading strategy entails the conditions of your trading set up, a set of conditions.

May it be trading with the trend, market structure, support and resistance, etc.

Then, it has to have an entry trigger.

What is the entry trigger that will get you in the trade?

After which it needs to have an exit.

How will you take your profits, or what happens if the trade goes against you?

Where will you put your stop loss and take profits?

What is your trade management?

If the trade goes in your favor and then start reversing against you, what will you do?

Will you bail out half of the position, everything, or something like that?

Then, you also have risk management.

How much will you be risking on each trade, and stuff like that.

As you can see…

The candlestick pattern is not a trading strategy!

Because a candlestick pattern by and itself will not give you all these important elements that a trading strategy requires.

If you ask me…

What it can offer is possibly just the entry and exit triggers.

But you can see that it definitely will not fulfill these important elements that you see over here.

Candlestick pattern, it is a not a trading strategy.

Another thing is that don’t use it for trend bias.

I know it’s a mistake that I used to make is that when I see a bullish engulfing pattern.

In my mind, the market is going higher.

I better be long because I don’t want to miss the move!

But again…

If you study the earlier videos I mentioned that it can be misleading.

Because candlestick pattern tells you momentarily what has happened for the moment.

But if you are to get a trend bias, it always pays to look at what is the trend of the market.

For example, this is a chart of USD/CAD.

And any ten-year-old kid would look at this and can you tell that the trend is very strong to the downside.

Here’s the thing…

If you choose to ignore the trend, the momentum, and you just want to look at candlestick patterns to give you a bias.

You can see that it can be very painful to trade against it!

On the chart, you have an engulfing, piercing pattern, and morning star.

You can see that true, these are all bullish reversal patterns…

But if you just look at them blindly, you don’t look at what is going on, what is the trend.

It’s going to be very painful to trade them.

This is another aspect which I want to emphasize.

Look at the trend.

It is your friend.

A candlestick pattern will not tell you what is the market likely to do.

The trend will tell you what the market is likely to do.

Now that you know how not to trade candlestick patterns, here is a quick recap…

Recap

  • Don’t trade it in isolation because it does not give you an edge in the markets.
  • It is not a trading strategy by and itself because as I’ve mentioned earlier, you need many components in a trading strategy.
  • Look at what the trend is. Don’t look at your candlestick pattern to tell you whether you should be long or short.

If you’re wondering, “Rayner, how do I define the trend and stuff like that?”

Again, go back to the start of this video.

Download the Ultimate Guide to Price Action Trading.

I cover a lot more topics like marketing structure, trend, and stuff like that.

Go and download it, and I believe it will really compliment to whatever you’re learning so far.

With that said, I have come to the end of this video and I’ll see you in the next.

  • Market Structure

How to trade Candlestick Patterns

In this video, we will be discussing how to trade candlestick patterns.

But before I do so I think it would make sense to kind of do a brief recap of what you have learned so far in this candlestick course:

  • We talked about the introduction to candlestick, how to read it, the open, high, low, close, etc.
  • The limitations of candlestick pattern. Candlestick patterns don’t tell you how the price move from point A to point B, from the open to the close.
  • The various patterns of candlestick like Harami, hammer, engulfing pattern, etc.
  • How not to trade candlestick patterns. You don’t want to be trading them in isolation because it doesn’t give you an edge in the markets.
  • Candlestick patterns by itself is not a trading strategy because it does not go into stuff like the condition of your trading setup, your risk management, your exits, etc.

So, needless to say, we will be discussing…

Market structure

Market structure is simply support and resistance on your charts, swing highs, and lows.

These are levels on your chart attracts the most attention.

Because traders all over the world can see them!

And this is where they base all of their trading positions.

Like looking to enter the breakout, and looking to place their stop loss at this obvious level.

And how you can combine candlestick patterns with market structure is that you are basically looking to enter your trades after strong price rejection.

Because this is where traders do get trapped.

Let me explain:


This chart is soybean oil futures.

As you can see, the market is somewhat in a range and it is contained between the area of resistance, support.

And then it had a strong price decline coming into the area of 32.62 support.

There will be traders who look at this and say, „Oh! man, look at this huge bearish momentum. I’m going short.”

So, they go short…

And what happens next is that on the next candle at support, you’ve got a Harami.

But I would say that the bulls are somewhat in control.

Why is that?

Because price came into the area of support and it got rejected relatively quickly!

And earlier if you recall, I mentioned that traders are trapped.

Who are these traders that got trapped?

They are basically traders who went to short the breakdown!

Most traders are feeling the pinch right now.

And most traders, I suppose, they would not use a stop loss.

And what happens when the markets go against you?

Chances are you would endure until you cannot tolerate the pain anymore and you cut your losses.

When you do cut your loss what happens?

From a short position and you exit your trade, it will suddenly become a buy order.

Because you need to use a buy order to exit your short position, and this would fuel for the price buying pressure.

This is why this setup works. Because you are basically profiting from traders who are trapped when they short the breakdown.

And this is a form of price rejection.

Price comes into a level and moves away quickly from that level.

Another example is this one over here is the EUR/NZD chart:

This is somewhat a counter-trend setup.

It’s going against this longer-term trend, but the principal still pretty much holds the same.

Traders will look at this chart and when it trades beyond this high they look to long the breakout!

Because they’re all „Hey! the trend is up, the price is breaking off the highs I better get long, I don’t want to miss this move.”

Price broke out above the previous swing high and then what happened?

The next candle… Boom!

You’ve got a bearish engulfing pattern.

Again, who is trapped right now?

Well, traders who are long are clearly trapped, because they expect the price to move higher and now price is turning against them.

And once again, eventually when they do cut their losses it would fuel further price decline.

But one thing to mention here is that if you look at a big picture…

You have to understand that overall, this long-term trend is still intact.

So, if you were to short this market, don’t expect a massive price reversal where the market collapse all the way.

No, no, no, don’t think along that lines because more often than not that’s not going to happen.

Instead, If you are going against the trend and just looking to capture one swing.

I would say that you only take just one swing.

Do not expect the entire move to reverse.

Because as I’ve said, candlestick patterns do not give you the direction of the trend.

This is a clear example of why candlestick patterns is not a strategy in and itself.

You still have to look at market structure, targets, and trade management, and stuff like that.

But what I’m trying to highlight to you here is that candlestick pattern can provide as an entry trigger, combined with market structure into when to enter your trade.

Okay?

So, with that said, let’s do a quick recap…

Recap

  • Candlestick patterns combined with the market structure like support resistance, swing highs and lows, can give you entry points and entry triggers.
  • And you want to enter your trades after strong price rejection because this is where traders get trapped.

I hope this gives you a good idea into how you can go about trading candlestick patterns

  • Volatility Contraction

What are the two market periods

In this video, we will be discussing how to go about using candlestick patterns during volatility contraction.

So, what is volatility contraction?

Here’s the thing…

The market moves from a period of low volatility to high volatility and vice versa.

If you don’t believe me just look at your charts…

Notice that the range of the market, the volatility is never constant!

It always breaks out and you have huge volatility.

And then the volatility kind of dies out, it gets a little slow, candle starts to contract and then it breaks out once again.

This is typically how the market cycle moves, from a period of low volatility to high volatility.

When you are trading, ideally, you want to be entering during a period of low-volatility.

Why is that?

Your stop loss is usually tighter during a period of low volatility.

If you think about it, it makes sense.

Because as the volatility contracts the range gets smaller.

Let me explain further…

How trading low volatility periods can benefit your capital

When the market is at a low volatility period…

You can easily reference the range to set your stop loss.

You would want to use a tool like the average true range indicator to set your stop loss.

The ATR value tends to be relatively low during low volatility period!

So, the benefit of having a tighter stop loss is that you can put on a large position size and still keep your risk constant.

Does it make sense?

A smaller stop loss allows you to increase your position size and still keep your risk constant.

Let’s say you’re risking let’s say $100.

If your risk per trade is always $100, then it’s simply a function of your stop loss and your position size.

If you have a tighter stop-loss, you can put on a large position size, and still keep your risk constant.

However, if your stop loss is larger, then your position size must be reduced to keep your risk constant at $100.

Another benefit to this is that when you enter your trade with a larger position size, it gives you a more favorable risk to reward!

Why is that?

Because you know that the market moves from a period of low volatility to high volatility.

If the market goes in your favor, and volatility expands, you can see that your R multiple on the trade can really rack up pretty quickly.

With that said, let me share with you a couple of examples of trading volatility contraction.

This one over here is the sugar futures:

And again, I’m just going to share with you generally what’s going on in this chart.

The trend is towards the downside.

And you can see that this market traded lower.

Came into the swing low or area of support at 17.97

And then volatility contracted!

How do I know that?

Well just look at the range of the candle.

It got smaller and smaller until it finally broke down.

All you need to do is compare the size of the range of the candle.

If it’s getting smaller it’s telling you that volatility has contracted.

And chances are when it breaks out, it will tend to expand again.

With that said, I just want to share with you a few pointers when you are looking to trade this type of breakouts.

Number one, have the trending move, trade in the favor of the direction of the trending move.

What is a trending move?

A trending move is basically the stronger leg of a trend line.

And the second thing, the volatility contraction, the VC.

You want to see those small candles.

Because you know, when it does break up you can expect the volatility to expand and pick up.

These are a couple of things to take note off.

Another example:

You can see a strong trending move.

Then when you find a volatility contraction, you get somewhat like a descending triangle.

Volatility expands when it broke down and then volatility contracted again!

You can see that this phenomenon pretty much happens all the time in different markets.

So how you want to go about trading it?

For me, personally, I like to look at the breakout from its low volatility range.

And stop loss is just usually referencing from the swing high or swing low.

For example, if price breaks down on the low, I’ll set it on 1x the Average True Range above the high of the pullback.

So this I know generally how I go about trading volatility contraction.

As I’ve said, I think this is a clear example that this isn’t a trading strategy by itself.

Candlestick patterns are useful to serve as an entry trigger.

But when it comes to stop loss or to trade management and risk management.

You can see that candlestick patterns are not able to go help you answer or manage all these scenarios.

I hope I’ve shed some light on how to go about trading candlestick patterns using volatility contraction.

With that, let’s do a quick recap…

Recap

  • The market moves from a period of low volatility to high volatility. You can see that the word volatility.
  • You want to enter your trades during a low-volatility period. Because you know it gives you a favorable risk-to-reward on your trades, and your stop-loss tend to be tighter.

With that said, I have basically come to the end this video.

And I hope this candlestick trading course really gave you a good foundation on how to go about trading candlestick patterns.

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