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Candlestick Profits
Simple Candlestick Techniques
and Strategies for Trading
Forex, Stocks and Options
Profitably
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Introduction
I want to thank you and congratulate you for downloading my
book, Candlestick Profits. This book contains proven techniques
and strategies on how to trade candlestick charts successfully.
With techniques I manly mean the candlestick charting method.
Strategies are the patterns you trade in conjunction with your
trading plan.
You will observe charts on examples. Study them carefully. Don
not worry if you are a new trader and don not understand
everything at first. After all, every successful trader was a
beginner at some point. You too can learn these skills.
Candlestick charts are according to many successful traders the
best tool for trading stocks, options and forex. Used because
they achieve improvements in performance that result in profits
for both swing and day traders.
In Candlestick Profits, you will learn:
• How candlestick charting can give you an edge
• The most powerful candlestick patterns
• Three trading strategies
• How to use candlestick in blend with technical analysis
• And much, much more!
Thanks again for downloading, I really hope you get the best out
of this book! - Johan Nordstrom
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© Copyright 2015 by Johan Nordstrom. All rights reserved.
This document is geared towards providing exact and reliable
information in regards to the topic and issue covered. This
information is for your personal use only. You cannot distribute,
copy, reproduce, or otherwise sell this product or information in
any form whatsoever, including but not limited to: electronic, or
mechanical, including photocopying, recording, or by any
informational storage or retrieval system without expressed
written, dated and signed permission from the publisher. All
copyrights are reserved.
The information herein is offered for informational purposes
solely, and is universal as so. The presentation of the information
is without contract or any type of guarantee assurance, and
should not be considered specific investment advice. Examples
are provided for illustrative purposes only. Past performance is
not necessarily indicative of future results. Trading is associated
with risk and capital may decrease in value. If advice is
necessary, legal or professional, a practiced individual in the
profession should be ordered.
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Contents
	
Candlestick Charting................................................................ 6
The Power of Candlestick Charting .................................................. 6
Candlestick History ....................................................................... 7
How to Succeed with Candlestick Charting ....................................... 8
Candlestick Charting Help You Avoid Mistakes .................................. 8
Get An Advantage Over Other Traders ......................................10
Increase Your Edge......................................................................11
Candlestick Construction.........................................................12
The Advantage Over Bar Charts.....................................................13
Tips for Emotion Free Charting ......................................................14
Winning Patterns ...................................................................16
Long Body Candle........................................................................17
Doji and Small Body Candle ..........................................................19
Hammer and Inverted Hammer .....................................................22
Learning the Patterns...................................................................25
Tips for Trading Candlesticks Successfully.......................................25
Winning Candlestick Techniques...............................................27
Adopting to Volatility....................................................................27
Avoid Patterns Inside Trading Range ..............................................27
Doji and Small Body Candle Breakouts ...........................................28
Long Body Candle Support and Resistance ......................................29
Develop an Understanding of The Psychology ..................................30
Determine The Strength of a Trend................................................33
Candlestick Strategies ............................................................35
The Hammer Strategy..................................................................35
The Inverted Hammer Strategy .....................................................37
The 50% Support Strategy ...........................................................39
The 50% Resistance Strategy........................................................41
The Break of Three Strategy .........................................................44
The Break of Three Short Strategy.................................................45
Combining Candlestick Patterns with Technical Analysis ..............48
Support and Resistance Levels ......................................................48
Supply and Demand Zones ...........................................................49
Fibonacci Levels ..........................................................................51
Trend Lines ................................................................................53
Indicators...................................................................................55
Conclusion ............................................................................59
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Candlestick Charting
Candlestick charting has a valuable aspect. It is visually easy to
see patterns and overall trend in the charts. This is an essential
part for any technical trader to master. In today’s trading
environment you need to have a clear plan and rules on how you
will trade profitably. Fortunately, the graphic picture that
candlestick charting express make it easy to take profitable
actions.
The Power of Candlestick Charting
The power of candlestick patterns is that they are created by the
change in sentiment and crowd psychology. A green candlestick
(candle) after a red candle shows that for now, the bulls are in
control. A red candle after a green candle shows that in that
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moment, the bears are in control. Having the insight of change in
sentiment and how traders react to price movements provides
the candlestick trader with a powerful advantage.
Candlestick charting makes it easier for you to deal with the
psychology of trading and feelings like greed and fear. Let me
give you a few examples:
• Candlestick patterns will give you clear alerts if the
sentiment has changed and it is time to take profits.
• Candlestick patters will give you feedback on the strength
and weakness of the trend helping you spot reversals.
• Candlestick patterns will give you the confident in your
trading to avoid fear.
Candlestick History
The charting method was built over a four hundred-year period.
Rationality dictates that a charting method that has endured that
long must work. The first candlestick traders broke the trading
period down to how the price opened, what the high and low was
during the period, and how the price closed.
The patterns were analyzed trade after trade, and year after
year. Many patterns were evaluated and the results were
patterns that produced profits so pronounced that they have
remained in existence for centuries. This fact alone is the most
powerful testimony that candlestick charting works.
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How to Succeed with Candlestick Charting
Even though candlestick patterns will give you an edge over
other traders, it is not a 100 percent winning method, so you will
need to follow some general trading principles if you want to
succeed:
• Have a trading plan - the set of rules and strategies you will
follow to profit in trading.
• Develop discipline - essential for helping you follow your
plan when you have had 3 or more losses in a row.
• Journal and track your trades - important for finding
mistakes and develop to become a better trader.
• Eliminate emotions - important for stopping fear and greed
to ruin your trading. Emotion free trading allows you to
make rational decisions and you will not have to wish that
the trade you just opened will work.
• Do not follow tips - traders who succeed are independent
and follow their own analysis.
• Before you open a trade - decide on the entry level, stop
loss level, and target level.
Candlestick Charting to Avoid Mistakes
Every trader makes mistakes. But great traders learn from
mistakes and avoid making them again. Have you ever:
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• Allowed fear to scare you out at the bottom or greed to pull
you in at the top?
• Sold out of your profitable positions too early because you
are afraid they will pull back and turn into losses?
• Hung on to your losing positions as they ratchet down, each
little up-tick giving you hope, but finally selling out at the
bottom because the pain is too great?
Recognizing and trading candlestick patterns puts you in control
of your trading and helps you to avoid mistakes. Candlestick
charting will also help you become a confident trader. If you have
an objective view when trading, you will learn to quickly identify
the trade that is not working, immediately exit the trade, then
enter the next position where the probabilities are in your favor.
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Get An Advantage Over Other
Traders
An edge is defined as “an advantage over other people”. So you
understand that having an edge when trading is important.
Trading is a zero sum game, those with an edge win, and those
without one lose. It is all about probabilities. Candlestick charts
will provide you with a powerful edge that will help you profit.
Nothing is certain in trading and every moment and trade is
unique, it is a numbers game. As a winning trader, you need to
have an edge, an advantage that gives you the probability of
winning over a series of trades. With an edge, you will have a
positive expectancy to earn a lot of money every year round. You
are making losses for some days each year but over the year,
you will profit.
There is not a single trading system in the world that have a
probability of hundred percent. The best ones have a probability
of around 80 percent of getting winning trades. There are many
strategies that are below 50 percent that still have a profitable
outcome. The reason you can make money on such system is
that profits are greater than the losses. Below you will learn the
basics of how a system is designed. It depends on two factors:
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• How many winning trades in relation to losing trades you
have.
• How big winning trades is in relation to losing trades.
A winning trading strategy has a value above one when you
multiply these two factors.
Examples of a system with an edge can be a system with win
ratio of 50 percent (you win one of every two trades) and profits
are five times larger than losses ($500 profit against $100 loss).
Another example of another system with an edge can be a
system with win ratio of 80 percent (you win four out of five
trades) and the profits are half of losses ($600 profit against
$1.200 loss).
Candlestick techniques and strategies can give you an edge,
using the techniques and strategies in this book you will be able
to make better and faster chart analysis and thereby taking high
probability trades.
Upgrade on Increase Your Edge
Candlestick charting is powerful like it is but when you combine it
with our winning trading strategy or your favorite technical
analysis technique you create an extremely powerful system.
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Candlestick Construction
Candlestick charting is so powerful it can be used in all time
frames and in stocks, futures, forex and every other market that
have an open, close, high and low. If we look at a daily time
frame, one candle (session) represents that day’s trading range.
Above you can see how the candlestick is constructed and looks
compared to a bar chart. The horizontal lines represent the open
and the close. The painted section is the candle body. The candle
body is green if the close is higher than the open. If the close is
lower than the open, the candle body is read. The lines above
and below the candle body are called tails. The top of the upper
tail is the sessions high and the bottom of the lower tail is the
session’s low of the day.
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The Advantage Over Bar Charts
The different colors of the candle bodies provide rapid visual
interpretations. A declining series of red candles is clearly
interrupted when a green candle appears which attracts the
attention of your eye immediately. This is something that would
not happen when viewing bar charts.
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Upgrade on Emotion Free Charting
The color does not have to be red and green. Red and green
coloring can actually be bad for some people because colors can
be associated with negative emotions. Example; a series of big
red candles form, a trader with negative feeling associated to red
can get scared and avoid taking a trade. It can also be a series of
green candles forming, a trader can feel overconfident that it is
going to continue up when in fact it is right at a resistance level
and ready to reverse.
I recommend you try different colors to find which combination
you enjoy best. Black and white is a popular color scheme and so
is green on black.
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Winning Patterns
In this chapter you will learn the winning bullish and bearish
candlestick patterns to maximize profits. Candlestick patterns are
mainly reversal signals, but that does not mean you only have to
trade them for trend reversals. You can also trade candlestick
patterns in pullbacks (or trend pauses).
The reason why trend reversals are hard to trade is since trends
often takes time to stop and reverse. Think of a trend like a car
driving on a road, it takes time for the car to stop (trend stop)
and turn (trend reverse) if the speed is high (if the trend is
strong).
Candlestick patterns can be used for both entry and exit signals,
most other trading techniques only give you the entry signal, not
the exit signal that often is the more important since you want to
ride the trend as long as possible without giving up to much
profit when the turning point comes.
Again, when you read this, remember, it is not important to
remember every name of the candlestick techniques, instead
focus on the power of the close in relation to the open and
yesterdays close.
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Long Body Candle
A long body candle with no or short tail indicates strong buying
or selling. The longer the body is, the more powerful the buying
or selling activity. A small body candle with no or short tail
implies very little buying or selling activity.
The bullish long body candle signals:
• Succeeding a bullish trend:
ü The trend is intact and bulls are in control
ü Note: if a long body candle appears late in a trend it
can be a blow out (last push before an retrace or
reversal)
• Succeeding a bearish trend:
ü Bulls surprises bears, possible trend reversal
ü Note: it is not unusual for the price to retrace back to
the 50% point of the long body candle before the
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reversal is confirmed (learn more in the strategy
chapter; “The 50% Support Strategy”)
• In a neutral trend/consolidation:
ü The bulls are ready to take control given that the close
of the candle is above the last high of the
consolidation
ü Note: this the preferred candle pattern to confirm
breakouts (learn more in the strategy chapter; “The
Break of Three Strategy”)
The bearish long body candle signals:
• Succeeding a bullish trend:
ü Bears surprises bulls, possible trend reversal
ü Note: it is not unusual for the price to retrace back to
the 50% point of the long body candle before price
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continue in the bearish direction (learn more in the
strategy chapter; “The 50% Resistance Strategy”)
• Succeeding a bearish trend:
ü The trend is intact and bears are in control
ü Note: if a long body candle appears late in a trend it
can be a blow out (last push before an retrace or
reversal)
• In a neutral trend/consolidation:
ü The bears are ready to take control given that the
close of the candle is above the last high
ü Note: this the preferred candle pattern to confirm
breakouts (learn more in the strategy chapter; “The
Break of Three Short Strategy”)
Doji and Small Body Candle
A session where the open and close has the same price is called
a doji.
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A session where the open and close has almost the same price is
called a small body candle and have the same logic as a doji.
This is a candle that signals indecision between bulls and bears.
The length of the tails will give you good information about the
volatility. Longer tails imply greater volatility which means
greater profits if you know how to trade them correctly. The color
has little importance on whether it is a bullish or bearish pattern,
a green candle is somewhat more bullish than a doji and a red
candle is somewhat more bearish than a doji.
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The doji and small body candle signals:
• Succeeding a bullish trend:
ü That the trend could reverse or just pausing, neither
bears or bulls are in control
• Succeeding a bearish trend:
ü That the trend could reverse or just pausing, neither
bears or bulls are in control
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• In a neutral trend/consolidation:
ü Nothing specific since it is in range (see more in the
techniques chapter “Avoid Patterns Inside Trading
Range”)
ü Note: if formed at the high or low that have not been
tested it can create a hammer and a strategy setup
(learn more in the strategy chapter; “The Hammer
Strategy” and “The Inverted Hammer Strategy”)
ü Note: if several dojis or small body candles forming at
the high or low of the range were high or low already
have been tested it could be charging for a breakout
(learn more in the strategy chapter; “The Break of
Three Strategy”)
Hammer and Inverted Hammer
A hammer is formed when the open and close are at the high of
the candle yet during the session bears where in control and at
one time this candle was a long body candle. This pattern signals
that bulls have more control.
An inverted hammer is formed when the open and close are at
the low of the candle yet during the session bulls where in control
and at one time this candle was a long body candle.
The length of the tails will give you good information about the
volatility. Longer tails imply greater volatility which means
greater profits if you know how to trade them correctly.
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The hammer signals:
• Succeeding a bullish trend:
ü Bears had control but bulls recovered during the end
of the session and are now back in control (during the
session this candle was a long body candle)
ü Note: this can be an indication that bulls are losing
strength
• Succeeding a bearish trend:
ü Bulls surprised bears who thought they were in control
(during the session this candle was a long body
candle), possible trend reversal (learn more in the
strategy chapter; “The Hammer Strategy”)
• In a neutral trend/consolidation:
ü Nothing specific since it is in range (see more in the
techniques chapter “Avoid Patterns Inside Trading
Range”)
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The inverted hammer signals:
• Succeeding a bullish trend:
ü Bears surprised bulls who thought they were in control
(during the session this candle was a long body
candle), possible trend reversal (learn more in the
strategy chapter; “The Inverted Hammer Strategy”)
• Succeeding a bearish trend:
ü Bulls had control but bears recovered during the end
of the session and are now back in control (during the
session this candle was a long body candle)
ü Note: this can be an indication that bears are losing
strength
• In a neutral trend/consolidation:
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ü Nothing specific since it is in range (see more in the
techniques chapter “Avoid Patterns Inside Trading
Range”)
Learning the Patterns
There is a big collection of patterns (doji, engulf, harami, etc.). It
is not important to remember every candlestick pattern and,
instead focus on learning these main patterns I have covered in
this chapter. Learn to understand the sentiment reaction to the
price action and what the possible outcome will be for the
patterns. The motivation of making profits will be your best boost
for the learning the patterns.
Upgrade on Trading Candlesticks Successfully
Here is a step-by-step process on how to trade the winning
patterns in combination with your trading style successfully:
1. Study charts and evaluate patterns at levels you usually
take entry at, you might for example be using:
a. Support and resistance
b. Momentum indicators
c. Fibonacci levels
d. Trend lines
e. Moving averages
f. Supply and demand zones
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2. Formulate the conditions meet when the pattern occur and
write them down (IF = THEN).
3. Take screenshots and copy into your trading plan.
4. Trade your trading plan with discipline.
5. Journal your trades and actions and write down your
thoughts and feelings before and after the trade.
6. Analyze your trades and actions; use your strength and
improve on your weaknesses and mistakes.
7. Make improvements to your trading plan adjusting it to
your strengths.
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Winning Candlestick Techniques
Adopting to Volatility
You probably know that falling markets are more volatile than
rising markets in most cases. Price often shows higher
recognition at first test to resistance in rising markets than
support at first test in falling markets. It is just like a car driving
downhill, it will have a longer breaking distance than a car
driving uphill. You can use this knowledge in trading by adopting
your trading strategy to take advantage of this.
Avoid Patterns Inside Trading Range
One important technique and concept when trading candlestick
reversal patterns is to pay more attention to them in situations
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where they occur at support and resistance levels and avoid
patterns inside a trading range.
Doji and Small Body Candle Breakouts
You know that the doji and small body candles are candlesticks
where neither the bulls nor bears control the session and the
market may be at a transition point. The technique to trade these
is to be patient and wait for confirmation of the direction. A
confirmation of a bullish breakout would be a close above the doji
or small body candle high.
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Long Body Candle Support and Resistance
A long body candle is a sign of strength and therefore these
candles will have hidden support and resistance levels. The level
you want to be trade is at the 50% level of the candle body.
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Develop an Understanding of The Psychology
Understanding the psychology behind candles is much more
important than remembering the name since these patterns not
always look exactly the same every time. Developing an
understanding of the price moves and how candles is formed will
give you information into what the market psychology is, and you
will easily spot changes in the sentiment of the market. The
technique below about determining strength is one way to
understand the psychology.
A long body candle with no or short tail indicates strong buying
or selling. The longer the body is, the more powerful the buying
or selling activity. A small body candle with no or short tail
implies very little buying or selling activity.
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A hammer and inverted hammer have tails. The hammer has a
long lower tail and short or no upper tail; this means there has
been a bulls rejection during the session. Bears forced price
lower but bulls quickly came in and drove prices back up to end
the session.
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The inverted hammer has a long upper tail and short lower tail;
this means there is a bears rejection during the session. Bulls
force price higher but bears quickly came in and drove prices
down to end the session.
A doji and the small body candle also have tails. Comparing the
small body candle and doji with the long body candle you can
understand that the bulls and bears have much more strength in
the long body candle.
The doji or small body candle has a long lower tail and long or
upper tail; this means there has been a bulls and bears rejection
during the session. Bears forced price lower but bulls quickly
came in and drove prices up then bears came in again and drove
prices down to the open price at the end the session.
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Or bulls forced price higher but bears quickly came in and drove
prices down then bulls came in again and drove prices up to the
open price at the end the session.
Determine The Strength of a Trend
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The length of the candle bodies and the tails (price action that is
outside the body of the candle) of the candles can give you a
good indication of the health or strength of a trend. A bullish
trend with good health is rising with long body candles and there
is not any long tails above the candlestick bodies. A bearish trend
with good health is falling with long body candles and there is not
any long tails below the candlestick bodies.
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Candlestick Strategies
The Hammer Strategy
This is a strategy that can be trader both long and short. (See
“The Inverted Hammer Strategy” for short setup. The logic
behind the strategy is; it is a double bottom where a new low is
formed but during the candle session but quickly recovers and
price come back above the low closing the session forming a
hammer (trapping breakout traders and stopped out those who
placed stops below the first low). The color the candle closes is
not important but it must close in the upper third of the candle
range.
Setup
• In a downtrend (lower highs and lower lows)
• A low has formed (first bottom)
• At least two candles are formed with lows above bottom
• A candle break below the first bottom but quickly recovers
and closes as a hammer candlestick
Entry
• Buy limit order at the hammer close
Stop Loss
• One tick below the hammer low
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Target
• 3x the stop loss distance (1:3 risk reward)
Examples of Setups
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The Inverted Hammer Strategy
The logic behind this strategy is the same as for “The Hammer
Trade” except the trade is in the other direction.
Setup
• In an uptrend (higher highs and higher lows)
• A high has formed (first high)
• At least two candles are formed with highs below the high
• A candle break above the first high but quickly fails and
closes as an inverted hammer candlestick
Entry
• Sell limit order at the inverted hammer close
Stop Loss
• One tick above the hammer high
Target
• 3x the stop loss distance (1:3 risk reward)
Examples of Setups
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The 50% Support Strategy
Logic behind this strategy; the market direction is indicated by a
long body candle and the strategy uses this by taking a trade at
the 50% level of a long body candle (the median of bullish
orders).
Setup
• A long body candle is formed with a range that is 2x the
average candle range and closes in its highest quarter
• There is no unfilled 50% Strategy setups in the opposite
direction looking back 50 candles
Entry
• Buy limit order at the 50% level of the long body candle
Stop Loss
• One tick below the candle low
• Trailing stop loss when a candle closes to new highs above
the high of the long body candle; move the stop loss to one
tick below the breakout candle
Target
• 5x the stop loss distance (1:5 risk reward)
Examples of Setups
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The 50% Resistance Strategy
Logic behind this strategy; the market direction is indicated by a
long body candle and the strategy uses this by taking a trade at
the 50% level of a long body candle (the median of bearish
orders).
Setup
• A long body candle is formed with a range that is 2x the
average candle range and closes in its lowest quarter
• There is no unfilled 50% Strategy setups in the opposite
direction looking back 50 candles
Entry
• Sell limit order at the 50% level of the long body candle
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Stop Loss
• One tick above the candle high
• Trailing stop loss when a candle closes to new lows below
the low of the long body candle; move the stop loss to one
tick above break out
Target
• 5x the stop loss distance (1:5 risk reward)
Examples of Setups
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The Break of Three Strategy
The logic behind the break of three setup correlated with “The
Hammer Trade” because it takes advantage of the strength of
the reaction that is the result from a failed “Hammer Trade”. It is
a breakout that occurs at the third test of a level that fails (as
long as the conditions are intact the strategy is valid for a
breakout on the fourth or fifth test of the level).
Setup
• In an uptrend (higher highs and higher lows)
• A new high is formed
• A second high is formed close to the first high (the second
high is the breakout level)
• Higher lows
Entry
• Buy market order one tick above the breakout level
Stop Loss
• One tick below the lowest candle between the second high
and the breakout
Target
• 2x the stop loss distance (1:2 risk reward), if you are bold
you can go with 3x the stop loss distance
Examples of Setups
45
The Break of Three Short Strategy
A breakout strategy that occurs at the third test of a level that
fails (as long as the conditions are intact the strategy is valid for
a breakout on the fourth or fifth test of the level).
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Setup
• In an downtrend (lower highs and lower lows)
• A new low is formed
• A second low is formed close to the first low (the second
low is the breakout level)
• Lower highs
Entry
• Sell market order one tick below the breakout level
Stop Loss
• One tick above the highest candle before between the
second low and the breakout
Target
• 2x the stop loss distance (1:2 risk reward)
Examples of Setups
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48
Combining Candlestick Patterns
with Technical Analysis
In this chapter we will look at some of the most popular technical
methods in combination with the candlestick patterns you just
learned. You will get an understanding on how you can use the
patterns with your current trading style. By combining
candlestick patterns with your favorite technical analysis method,
you will most likely improve your performance and profits.
Support and Resistance Levels
Horizontal support and resistance levels are the most powerful
levels because everyone can see them, they are visual easy to
spot. Local tops and bottoms in a trend can be viewed as support
and resistance levels. Horizontal price levels that act as support
or resistance does not lose its importance after broken. A support
level often becomes resistance after broken and a resistance
level often becomes support after broken.
The closer in time a support or resistance was created the more
significant it will be. This is because traders and investors tend to
remember recent price moves and have interest these levels
because they are invested above or below them.
49
Supply and Demand Zones
Trading supply and demand zones are zones price have made a
strong advance or decline from. The logic behind supply and
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demand zones is that banks and hedge funds decide on specific
zones (prices) where they want to get their orders filled. Their
trading creates strong advance (from demand zone) or a strong
decline (supply zone). Usually their orders are so large they are
not able to get their orders filled so they leave pending orders in
the zone to buy or sell expecting that this price will come back to
this zone so their orders get filled.
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Fibonacci Levels
Fibonacci levels are based on the numbers identified by Leonardo
Fibonacci, a mathematician in the thirteen-century. The Fibonacci
levels are calculated by dividing the vertical distance between
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two points (a high and low) by the Fibonacci ratios. The ratios
play an important part in nature and are proven to play an
important part in trading too. Will look at the most important
levels 61.8% and 50% in these examples.
53
Trend Lines
Trend lines can be used to get a visual indication in what
direction the trend is heading. The lines can be used to find
support and resistance levels but they are not as powerful as
horizontal lines since there is a million ways to draw a sloping
trend line. A rising trend line is drawn from left to right
connecting rising bottoms. You need at least two bottoms where
the second is higher than the first to draw a rising trend line. A
falling trend line is drawn from left to right connecting falling
highs.
There are some generalities on trend lines. The longer the trend
line is valid the more significant it become, trend lines drawn
over several years is viewed to be more significant than a trend
54
line drawn over a few days since the second have a higher
probability of being broken.
55
Indicators
Disclaimer: I do not recommend using indicators if you can read
candlesticks (price) and levels. Indicators are calculated on price
and therefore, indicators will not increase your edge or give you
any more information what is already in the charts.
Trend Following Indicator
If you like trend following indicators, you can use them in
combination with candlesticks. The charts below show how a
moving average (50) can be traded with the candlestick patterns.
Additional popular trend following indicators includes MACD,
Channel indicators, ADX and more.
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Momentum Indicators
If you like momentum indicators, you can use them in
combination with candlestick patterns. Momentum indicators
intended use is to identify when a move from overbought to
oversold areas or from oversold to overbought happens. The
definition of overbought according to momentum indicators;
when price rises above symmetry and becomes expensive
relative to the prevailing trend. Momentum indicators can also be
used to analyze the strength or speed of the trend.
RSI is probably the most well-known momentum indicator. It
measures the relative strength of price and can assume values
between 0 and 100. The value increases when price has
increased many days in a period and the value decrease when
price have decreased many days in a period. A RSI value above
57
70 is considered overbought when the trend is neutral, but if the
trend is up, a RSI value above 70 can be a confirmation that the
trend is still strong and that price will continue to higher prices. A
RSI value below 30 is considered oversold, if in neutral trend, but
if price is in a downtrend it can be considered to be a trend
confirmation. In the chart you can see that RSI gives an
overbought value when price is in the upper range of the neutral
trend channel and an oversold value when price is in the lower
range.
58
59
Conclusion
Thank you again for downloading this book!
I hope you learned much from this book about how you can
increase your edge in the market using candlestick charting and
that you understand the benefits of quickly determine if bulls or
bears are in control. Now you have an arsenal of powerful buy
and sell signals. I wish you good trading and profits!
Finally, if you enjoyed this book, then I would like to ask you for
a favor, would you be kind enough to leave me a review for this
book? Email me at johan@tradingwalk.com
Thank you!
- Johan Nordstrom
Visit my website at http://www.tradingwalk.com

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CANDLESTICK PROFITS.pdf

  • 1.
  • 2. 2 Candlestick Profits Simple Candlestick Techniques and Strategies for Trading Forex, Stocks and Options Profitably
  • 3. 3 Introduction I want to thank you and congratulate you for downloading my book, Candlestick Profits. This book contains proven techniques and strategies on how to trade candlestick charts successfully. With techniques I manly mean the candlestick charting method. Strategies are the patterns you trade in conjunction with your trading plan. You will observe charts on examples. Study them carefully. Don not worry if you are a new trader and don not understand everything at first. After all, every successful trader was a beginner at some point. You too can learn these skills. Candlestick charts are according to many successful traders the best tool for trading stocks, options and forex. Used because they achieve improvements in performance that result in profits for both swing and day traders. In Candlestick Profits, you will learn: • How candlestick charting can give you an edge • The most powerful candlestick patterns • Three trading strategies • How to use candlestick in blend with technical analysis • And much, much more! Thanks again for downloading, I really hope you get the best out of this book! - Johan Nordstrom
  • 4. 4 © Copyright 2015 by Johan Nordstrom. All rights reserved. This document is geared towards providing exact and reliable information in regards to the topic and issue covered. This information is for your personal use only. You cannot distribute, copy, reproduce, or otherwise sell this product or information in any form whatsoever, including but not limited to: electronic, or mechanical, including photocopying, recording, or by any informational storage or retrieval system without expressed written, dated and signed permission from the publisher. All copyrights are reserved. The information herein is offered for informational purposes solely, and is universal as so. The presentation of the information is without contract or any type of guarantee assurance, and should not be considered specific investment advice. Examples are provided for illustrative purposes only. Past performance is not necessarily indicative of future results. Trading is associated with risk and capital may decrease in value. If advice is necessary, legal or professional, a practiced individual in the profession should be ordered.
  • 5. 5 Contents Candlestick Charting................................................................ 6 The Power of Candlestick Charting .................................................. 6 Candlestick History ....................................................................... 7 How to Succeed with Candlestick Charting ....................................... 8 Candlestick Charting Help You Avoid Mistakes .................................. 8 Get An Advantage Over Other Traders ......................................10 Increase Your Edge......................................................................11 Candlestick Construction.........................................................12 The Advantage Over Bar Charts.....................................................13 Tips for Emotion Free Charting ......................................................14 Winning Patterns ...................................................................16 Long Body Candle........................................................................17 Doji and Small Body Candle ..........................................................19 Hammer and Inverted Hammer .....................................................22 Learning the Patterns...................................................................25 Tips for Trading Candlesticks Successfully.......................................25 Winning Candlestick Techniques...............................................27 Adopting to Volatility....................................................................27 Avoid Patterns Inside Trading Range ..............................................27 Doji and Small Body Candle Breakouts ...........................................28 Long Body Candle Support and Resistance ......................................29 Develop an Understanding of The Psychology ..................................30 Determine The Strength of a Trend................................................33 Candlestick Strategies ............................................................35 The Hammer Strategy..................................................................35 The Inverted Hammer Strategy .....................................................37 The 50% Support Strategy ...........................................................39 The 50% Resistance Strategy........................................................41 The Break of Three Strategy .........................................................44 The Break of Three Short Strategy.................................................45 Combining Candlestick Patterns with Technical Analysis ..............48 Support and Resistance Levels ......................................................48 Supply and Demand Zones ...........................................................49 Fibonacci Levels ..........................................................................51 Trend Lines ................................................................................53 Indicators...................................................................................55 Conclusion ............................................................................59
  • 6. 6 Candlestick Charting Candlestick charting has a valuable aspect. It is visually easy to see patterns and overall trend in the charts. This is an essential part for any technical trader to master. In today’s trading environment you need to have a clear plan and rules on how you will trade profitably. Fortunately, the graphic picture that candlestick charting express make it easy to take profitable actions. The Power of Candlestick Charting The power of candlestick patterns is that they are created by the change in sentiment and crowd psychology. A green candlestick (candle) after a red candle shows that for now, the bulls are in control. A red candle after a green candle shows that in that
  • 7. 7 moment, the bears are in control. Having the insight of change in sentiment and how traders react to price movements provides the candlestick trader with a powerful advantage. Candlestick charting makes it easier for you to deal with the psychology of trading and feelings like greed and fear. Let me give you a few examples: • Candlestick patterns will give you clear alerts if the sentiment has changed and it is time to take profits. • Candlestick patters will give you feedback on the strength and weakness of the trend helping you spot reversals. • Candlestick patterns will give you the confident in your trading to avoid fear. Candlestick History The charting method was built over a four hundred-year period. Rationality dictates that a charting method that has endured that long must work. The first candlestick traders broke the trading period down to how the price opened, what the high and low was during the period, and how the price closed. The patterns were analyzed trade after trade, and year after year. Many patterns were evaluated and the results were patterns that produced profits so pronounced that they have remained in existence for centuries. This fact alone is the most powerful testimony that candlestick charting works.
  • 8. 8 How to Succeed with Candlestick Charting Even though candlestick patterns will give you an edge over other traders, it is not a 100 percent winning method, so you will need to follow some general trading principles if you want to succeed: • Have a trading plan - the set of rules and strategies you will follow to profit in trading. • Develop discipline - essential for helping you follow your plan when you have had 3 or more losses in a row. • Journal and track your trades - important for finding mistakes and develop to become a better trader. • Eliminate emotions - important for stopping fear and greed to ruin your trading. Emotion free trading allows you to make rational decisions and you will not have to wish that the trade you just opened will work. • Do not follow tips - traders who succeed are independent and follow their own analysis. • Before you open a trade - decide on the entry level, stop loss level, and target level. Candlestick Charting to Avoid Mistakes Every trader makes mistakes. But great traders learn from mistakes and avoid making them again. Have you ever:
  • 9. 9 • Allowed fear to scare you out at the bottom or greed to pull you in at the top? • Sold out of your profitable positions too early because you are afraid they will pull back and turn into losses? • Hung on to your losing positions as they ratchet down, each little up-tick giving you hope, but finally selling out at the bottom because the pain is too great? Recognizing and trading candlestick patterns puts you in control of your trading and helps you to avoid mistakes. Candlestick charting will also help you become a confident trader. If you have an objective view when trading, you will learn to quickly identify the trade that is not working, immediately exit the trade, then enter the next position where the probabilities are in your favor.
  • 10. 10 Get An Advantage Over Other Traders An edge is defined as “an advantage over other people”. So you understand that having an edge when trading is important. Trading is a zero sum game, those with an edge win, and those without one lose. It is all about probabilities. Candlestick charts will provide you with a powerful edge that will help you profit. Nothing is certain in trading and every moment and trade is unique, it is a numbers game. As a winning trader, you need to have an edge, an advantage that gives you the probability of winning over a series of trades. With an edge, you will have a positive expectancy to earn a lot of money every year round. You are making losses for some days each year but over the year, you will profit. There is not a single trading system in the world that have a probability of hundred percent. The best ones have a probability of around 80 percent of getting winning trades. There are many strategies that are below 50 percent that still have a profitable outcome. The reason you can make money on such system is that profits are greater than the losses. Below you will learn the basics of how a system is designed. It depends on two factors:
  • 11. 11 • How many winning trades in relation to losing trades you have. • How big winning trades is in relation to losing trades. A winning trading strategy has a value above one when you multiply these two factors. Examples of a system with an edge can be a system with win ratio of 50 percent (you win one of every two trades) and profits are five times larger than losses ($500 profit against $100 loss). Another example of another system with an edge can be a system with win ratio of 80 percent (you win four out of five trades) and the profits are half of losses ($600 profit against $1.200 loss). Candlestick techniques and strategies can give you an edge, using the techniques and strategies in this book you will be able to make better and faster chart analysis and thereby taking high probability trades. Upgrade on Increase Your Edge Candlestick charting is powerful like it is but when you combine it with our winning trading strategy or your favorite technical analysis technique you create an extremely powerful system.
  • 12. 12 Candlestick Construction Candlestick charting is so powerful it can be used in all time frames and in stocks, futures, forex and every other market that have an open, close, high and low. If we look at a daily time frame, one candle (session) represents that day’s trading range. Above you can see how the candlestick is constructed and looks compared to a bar chart. The horizontal lines represent the open and the close. The painted section is the candle body. The candle body is green if the close is higher than the open. If the close is lower than the open, the candle body is read. The lines above and below the candle body are called tails. The top of the upper tail is the sessions high and the bottom of the lower tail is the session’s low of the day.
  • 13. 13 The Advantage Over Bar Charts The different colors of the candle bodies provide rapid visual interpretations. A declining series of red candles is clearly interrupted when a green candle appears which attracts the attention of your eye immediately. This is something that would not happen when viewing bar charts.
  • 14. 14 Upgrade on Emotion Free Charting The color does not have to be red and green. Red and green coloring can actually be bad for some people because colors can be associated with negative emotions. Example; a series of big red candles form, a trader with negative feeling associated to red can get scared and avoid taking a trade. It can also be a series of green candles forming, a trader can feel overconfident that it is going to continue up when in fact it is right at a resistance level and ready to reverse. I recommend you try different colors to find which combination you enjoy best. Black and white is a popular color scheme and so is green on black.
  • 15. 15
  • 16. 16 Winning Patterns In this chapter you will learn the winning bullish and bearish candlestick patterns to maximize profits. Candlestick patterns are mainly reversal signals, but that does not mean you only have to trade them for trend reversals. You can also trade candlestick patterns in pullbacks (or trend pauses). The reason why trend reversals are hard to trade is since trends often takes time to stop and reverse. Think of a trend like a car driving on a road, it takes time for the car to stop (trend stop) and turn (trend reverse) if the speed is high (if the trend is strong). Candlestick patterns can be used for both entry and exit signals, most other trading techniques only give you the entry signal, not the exit signal that often is the more important since you want to ride the trend as long as possible without giving up to much profit when the turning point comes. Again, when you read this, remember, it is not important to remember every name of the candlestick techniques, instead focus on the power of the close in relation to the open and yesterdays close.
  • 17. 17 Long Body Candle A long body candle with no or short tail indicates strong buying or selling. The longer the body is, the more powerful the buying or selling activity. A small body candle with no or short tail implies very little buying or selling activity. The bullish long body candle signals: • Succeeding a bullish trend: ü The trend is intact and bulls are in control ü Note: if a long body candle appears late in a trend it can be a blow out (last push before an retrace or reversal) • Succeeding a bearish trend: ü Bulls surprises bears, possible trend reversal ü Note: it is not unusual for the price to retrace back to the 50% point of the long body candle before the
  • 18. 18 reversal is confirmed (learn more in the strategy chapter; “The 50% Support Strategy”) • In a neutral trend/consolidation: ü The bulls are ready to take control given that the close of the candle is above the last high of the consolidation ü Note: this the preferred candle pattern to confirm breakouts (learn more in the strategy chapter; “The Break of Three Strategy”) The bearish long body candle signals: • Succeeding a bullish trend: ü Bears surprises bulls, possible trend reversal ü Note: it is not unusual for the price to retrace back to the 50% point of the long body candle before price
  • 19. 19 continue in the bearish direction (learn more in the strategy chapter; “The 50% Resistance Strategy”) • Succeeding a bearish trend: ü The trend is intact and bears are in control ü Note: if a long body candle appears late in a trend it can be a blow out (last push before an retrace or reversal) • In a neutral trend/consolidation: ü The bears are ready to take control given that the close of the candle is above the last high ü Note: this the preferred candle pattern to confirm breakouts (learn more in the strategy chapter; “The Break of Three Short Strategy”) Doji and Small Body Candle A session where the open and close has the same price is called a doji.
  • 20. 20 A session where the open and close has almost the same price is called a small body candle and have the same logic as a doji. This is a candle that signals indecision between bulls and bears. The length of the tails will give you good information about the volatility. Longer tails imply greater volatility which means greater profits if you know how to trade them correctly. The color has little importance on whether it is a bullish or bearish pattern, a green candle is somewhat more bullish than a doji and a red candle is somewhat more bearish than a doji.
  • 21. 21 The doji and small body candle signals: • Succeeding a bullish trend: ü That the trend could reverse or just pausing, neither bears or bulls are in control • Succeeding a bearish trend: ü That the trend could reverse or just pausing, neither bears or bulls are in control
  • 22. 22 • In a neutral trend/consolidation: ü Nothing specific since it is in range (see more in the techniques chapter “Avoid Patterns Inside Trading Range”) ü Note: if formed at the high or low that have not been tested it can create a hammer and a strategy setup (learn more in the strategy chapter; “The Hammer Strategy” and “The Inverted Hammer Strategy”) ü Note: if several dojis or small body candles forming at the high or low of the range were high or low already have been tested it could be charging for a breakout (learn more in the strategy chapter; “The Break of Three Strategy”) Hammer and Inverted Hammer A hammer is formed when the open and close are at the high of the candle yet during the session bears where in control and at one time this candle was a long body candle. This pattern signals that bulls have more control. An inverted hammer is formed when the open and close are at the low of the candle yet during the session bulls where in control and at one time this candle was a long body candle. The length of the tails will give you good information about the volatility. Longer tails imply greater volatility which means greater profits if you know how to trade them correctly.
  • 23. 23 The hammer signals: • Succeeding a bullish trend: ü Bears had control but bulls recovered during the end of the session and are now back in control (during the session this candle was a long body candle) ü Note: this can be an indication that bulls are losing strength • Succeeding a bearish trend: ü Bulls surprised bears who thought they were in control (during the session this candle was a long body candle), possible trend reversal (learn more in the strategy chapter; “The Hammer Strategy”) • In a neutral trend/consolidation: ü Nothing specific since it is in range (see more in the techniques chapter “Avoid Patterns Inside Trading Range”)
  • 24. 24 The inverted hammer signals: • Succeeding a bullish trend: ü Bears surprised bulls who thought they were in control (during the session this candle was a long body candle), possible trend reversal (learn more in the strategy chapter; “The Inverted Hammer Strategy”) • Succeeding a bearish trend: ü Bulls had control but bears recovered during the end of the session and are now back in control (during the session this candle was a long body candle) ü Note: this can be an indication that bears are losing strength • In a neutral trend/consolidation:
  • 25. 25 ü Nothing specific since it is in range (see more in the techniques chapter “Avoid Patterns Inside Trading Range”) Learning the Patterns There is a big collection of patterns (doji, engulf, harami, etc.). It is not important to remember every candlestick pattern and, instead focus on learning these main patterns I have covered in this chapter. Learn to understand the sentiment reaction to the price action and what the possible outcome will be for the patterns. The motivation of making profits will be your best boost for the learning the patterns. Upgrade on Trading Candlesticks Successfully Here is a step-by-step process on how to trade the winning patterns in combination with your trading style successfully: 1. Study charts and evaluate patterns at levels you usually take entry at, you might for example be using: a. Support and resistance b. Momentum indicators c. Fibonacci levels d. Trend lines e. Moving averages f. Supply and demand zones
  • 26. 26 2. Formulate the conditions meet when the pattern occur and write them down (IF = THEN). 3. Take screenshots and copy into your trading plan. 4. Trade your trading plan with discipline. 5. Journal your trades and actions and write down your thoughts and feelings before and after the trade. 6. Analyze your trades and actions; use your strength and improve on your weaknesses and mistakes. 7. Make improvements to your trading plan adjusting it to your strengths.
  • 27. 27 Winning Candlestick Techniques Adopting to Volatility You probably know that falling markets are more volatile than rising markets in most cases. Price often shows higher recognition at first test to resistance in rising markets than support at first test in falling markets. It is just like a car driving downhill, it will have a longer breaking distance than a car driving uphill. You can use this knowledge in trading by adopting your trading strategy to take advantage of this. Avoid Patterns Inside Trading Range One important technique and concept when trading candlestick reversal patterns is to pay more attention to them in situations
  • 28. 28 where they occur at support and resistance levels and avoid patterns inside a trading range. Doji and Small Body Candle Breakouts You know that the doji and small body candles are candlesticks where neither the bulls nor bears control the session and the market may be at a transition point. The technique to trade these is to be patient and wait for confirmation of the direction. A confirmation of a bullish breakout would be a close above the doji or small body candle high.
  • 29. 29 Long Body Candle Support and Resistance A long body candle is a sign of strength and therefore these candles will have hidden support and resistance levels. The level you want to be trade is at the 50% level of the candle body.
  • 30. 30 Develop an Understanding of The Psychology Understanding the psychology behind candles is much more important than remembering the name since these patterns not always look exactly the same every time. Developing an understanding of the price moves and how candles is formed will give you information into what the market psychology is, and you will easily spot changes in the sentiment of the market. The technique below about determining strength is one way to understand the psychology. A long body candle with no or short tail indicates strong buying or selling. The longer the body is, the more powerful the buying or selling activity. A small body candle with no or short tail implies very little buying or selling activity.
  • 31. 31 A hammer and inverted hammer have tails. The hammer has a long lower tail and short or no upper tail; this means there has been a bulls rejection during the session. Bears forced price lower but bulls quickly came in and drove prices back up to end the session.
  • 32. 32 The inverted hammer has a long upper tail and short lower tail; this means there is a bears rejection during the session. Bulls force price higher but bears quickly came in and drove prices down to end the session. A doji and the small body candle also have tails. Comparing the small body candle and doji with the long body candle you can understand that the bulls and bears have much more strength in the long body candle. The doji or small body candle has a long lower tail and long or upper tail; this means there has been a bulls and bears rejection during the session. Bears forced price lower but bulls quickly came in and drove prices up then bears came in again and drove prices down to the open price at the end the session.
  • 33. 33 Or bulls forced price higher but bears quickly came in and drove prices down then bulls came in again and drove prices up to the open price at the end the session. Determine The Strength of a Trend
  • 34. 34 The length of the candle bodies and the tails (price action that is outside the body of the candle) of the candles can give you a good indication of the health or strength of a trend. A bullish trend with good health is rising with long body candles and there is not any long tails above the candlestick bodies. A bearish trend with good health is falling with long body candles and there is not any long tails below the candlestick bodies.
  • 35. 35 Candlestick Strategies The Hammer Strategy This is a strategy that can be trader both long and short. (See “The Inverted Hammer Strategy” for short setup. The logic behind the strategy is; it is a double bottom where a new low is formed but during the candle session but quickly recovers and price come back above the low closing the session forming a hammer (trapping breakout traders and stopped out those who placed stops below the first low). The color the candle closes is not important but it must close in the upper third of the candle range. Setup • In a downtrend (lower highs and lower lows) • A low has formed (first bottom) • At least two candles are formed with lows above bottom • A candle break below the first bottom but quickly recovers and closes as a hammer candlestick Entry • Buy limit order at the hammer close Stop Loss • One tick below the hammer low
  • 36. 36 Target • 3x the stop loss distance (1:3 risk reward) Examples of Setups
  • 37. 37 The Inverted Hammer Strategy The logic behind this strategy is the same as for “The Hammer Trade” except the trade is in the other direction. Setup • In an uptrend (higher highs and higher lows) • A high has formed (first high) • At least two candles are formed with highs below the high • A candle break above the first high but quickly fails and closes as an inverted hammer candlestick Entry • Sell limit order at the inverted hammer close Stop Loss • One tick above the hammer high Target • 3x the stop loss distance (1:3 risk reward) Examples of Setups
  • 38. 38
  • 39. 39 The 50% Support Strategy Logic behind this strategy; the market direction is indicated by a long body candle and the strategy uses this by taking a trade at the 50% level of a long body candle (the median of bullish orders). Setup • A long body candle is formed with a range that is 2x the average candle range and closes in its highest quarter • There is no unfilled 50% Strategy setups in the opposite direction looking back 50 candles Entry • Buy limit order at the 50% level of the long body candle Stop Loss • One tick below the candle low • Trailing stop loss when a candle closes to new highs above the high of the long body candle; move the stop loss to one tick below the breakout candle Target • 5x the stop loss distance (1:5 risk reward) Examples of Setups
  • 40. 40
  • 41. 41 The 50% Resistance Strategy Logic behind this strategy; the market direction is indicated by a long body candle and the strategy uses this by taking a trade at the 50% level of a long body candle (the median of bearish orders). Setup • A long body candle is formed with a range that is 2x the average candle range and closes in its lowest quarter • There is no unfilled 50% Strategy setups in the opposite direction looking back 50 candles Entry • Sell limit order at the 50% level of the long body candle
  • 42. 42 Stop Loss • One tick above the candle high • Trailing stop loss when a candle closes to new lows below the low of the long body candle; move the stop loss to one tick above break out Target • 5x the stop loss distance (1:5 risk reward) Examples of Setups
  • 43. 43
  • 44. 44 The Break of Three Strategy The logic behind the break of three setup correlated with “The Hammer Trade” because it takes advantage of the strength of the reaction that is the result from a failed “Hammer Trade”. It is a breakout that occurs at the third test of a level that fails (as long as the conditions are intact the strategy is valid for a breakout on the fourth or fifth test of the level). Setup • In an uptrend (higher highs and higher lows) • A new high is formed • A second high is formed close to the first high (the second high is the breakout level) • Higher lows Entry • Buy market order one tick above the breakout level Stop Loss • One tick below the lowest candle between the second high and the breakout Target • 2x the stop loss distance (1:2 risk reward), if you are bold you can go with 3x the stop loss distance Examples of Setups
  • 45. 45 The Break of Three Short Strategy A breakout strategy that occurs at the third test of a level that fails (as long as the conditions are intact the strategy is valid for a breakout on the fourth or fifth test of the level).
  • 46. 46 Setup • In an downtrend (lower highs and lower lows) • A new low is formed • A second low is formed close to the first low (the second low is the breakout level) • Lower highs Entry • Sell market order one tick below the breakout level Stop Loss • One tick above the highest candle before between the second low and the breakout Target • 2x the stop loss distance (1:2 risk reward) Examples of Setups
  • 47. 47
  • 48. 48 Combining Candlestick Patterns with Technical Analysis In this chapter we will look at some of the most popular technical methods in combination with the candlestick patterns you just learned. You will get an understanding on how you can use the patterns with your current trading style. By combining candlestick patterns with your favorite technical analysis method, you will most likely improve your performance and profits. Support and Resistance Levels Horizontal support and resistance levels are the most powerful levels because everyone can see them, they are visual easy to spot. Local tops and bottoms in a trend can be viewed as support and resistance levels. Horizontal price levels that act as support or resistance does not lose its importance after broken. A support level often becomes resistance after broken and a resistance level often becomes support after broken. The closer in time a support or resistance was created the more significant it will be. This is because traders and investors tend to remember recent price moves and have interest these levels because they are invested above or below them.
  • 49. 49 Supply and Demand Zones Trading supply and demand zones are zones price have made a strong advance or decline from. The logic behind supply and
  • 50. 50 demand zones is that banks and hedge funds decide on specific zones (prices) where they want to get their orders filled. Their trading creates strong advance (from demand zone) or a strong decline (supply zone). Usually their orders are so large they are not able to get their orders filled so they leave pending orders in the zone to buy or sell expecting that this price will come back to this zone so their orders get filled.
  • 51. 51 Fibonacci Levels Fibonacci levels are based on the numbers identified by Leonardo Fibonacci, a mathematician in the thirteen-century. The Fibonacci levels are calculated by dividing the vertical distance between
  • 52. 52 two points (a high and low) by the Fibonacci ratios. The ratios play an important part in nature and are proven to play an important part in trading too. Will look at the most important levels 61.8% and 50% in these examples.
  • 53. 53 Trend Lines Trend lines can be used to get a visual indication in what direction the trend is heading. The lines can be used to find support and resistance levels but they are not as powerful as horizontal lines since there is a million ways to draw a sloping trend line. A rising trend line is drawn from left to right connecting rising bottoms. You need at least two bottoms where the second is higher than the first to draw a rising trend line. A falling trend line is drawn from left to right connecting falling highs. There are some generalities on trend lines. The longer the trend line is valid the more significant it become, trend lines drawn over several years is viewed to be more significant than a trend
  • 54. 54 line drawn over a few days since the second have a higher probability of being broken.
  • 55. 55 Indicators Disclaimer: I do not recommend using indicators if you can read candlesticks (price) and levels. Indicators are calculated on price and therefore, indicators will not increase your edge or give you any more information what is already in the charts. Trend Following Indicator If you like trend following indicators, you can use them in combination with candlesticks. The charts below show how a moving average (50) can be traded with the candlestick patterns. Additional popular trend following indicators includes MACD, Channel indicators, ADX and more.
  • 56. 56 Momentum Indicators If you like momentum indicators, you can use them in combination with candlestick patterns. Momentum indicators intended use is to identify when a move from overbought to oversold areas or from oversold to overbought happens. The definition of overbought according to momentum indicators; when price rises above symmetry and becomes expensive relative to the prevailing trend. Momentum indicators can also be used to analyze the strength or speed of the trend. RSI is probably the most well-known momentum indicator. It measures the relative strength of price and can assume values between 0 and 100. The value increases when price has increased many days in a period and the value decrease when price have decreased many days in a period. A RSI value above
  • 57. 57 70 is considered overbought when the trend is neutral, but if the trend is up, a RSI value above 70 can be a confirmation that the trend is still strong and that price will continue to higher prices. A RSI value below 30 is considered oversold, if in neutral trend, but if price is in a downtrend it can be considered to be a trend confirmation. In the chart you can see that RSI gives an overbought value when price is in the upper range of the neutral trend channel and an oversold value when price is in the lower range.
  • 58. 58
  • 59. 59 Conclusion Thank you again for downloading this book! I hope you learned much from this book about how you can increase your edge in the market using candlestick charting and that you understand the benefits of quickly determine if bulls or bears are in control. Now you have an arsenal of powerful buy and sell signals. I wish you good trading and profits! Finally, if you enjoyed this book, then I would like to ask you for a favor, would you be kind enough to leave me a review for this book? Email me at johan@tradingwalk.com Thank you! - Johan Nordstrom Visit my website at http://www.tradingwalk.com