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CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE

CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED

RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT

BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE

IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.

SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT

THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING

MADE THAT ANY ACCOUNT WILL OR IS LIKELY

TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

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Table of Content

!!Thanks!! ....................................................................................................................................... 5

1. Technical Analysis Basics ......................................................................................................7

2. Japanese Candlestick Charts................................................................................................ 8

3. The Mighty “Candlestick”!!...................................................................................................10

A. Bearish Candle ..................................................................................................................11

B. Bullish Candle ....................................................................................................................12

4. Candlestick Charts................................................................................................................13

A. Basic of Candlestick ......................................................................................................13

Single Candlestick Formation ..................................................................................................19

A. Marubozu Candles .........................................................................................................20

B. Doji & Spinning Top .....................................................................................................21

C. Hammer ...........................................................................................................................25

D. Hanging Man...................................................................................................................27

E. Bearish Reversal Candlestick pattern .......................................................................28

Relative Candlestick Formation...............................................................................................31

A. Support and Resistance Blast.....................................................................................32

B. Candle Eating Candle....................................................................................................36

C. Placing Stop-Loss ..........................................................................................................37

D. Morning Star ...................................................................................................................38

E. Evening Star ...................................................................................................................40

A. Double Top & Double Bottom .....................................................................................42

B. Cup and Handle Pattern ...............................................................................................46

C. Consolidation-Explosion Pattern ................................................................................47

D. Triangle Formation ........................................................................................................49




E. Hit Hit Hit and Return!! ................................................................................................54

F. Channels ..........................................................................................................................56

G. Head and Shoulder Pattern .........................................................................................57

5. Important Points to Remember while using Candles ..................................................63

6. A Common mistake – The one you must avoid..always!! ............................................66

7. What’s next?........................................................................................................................67




!!Thanks!!

Hello my trader friend,

Thanks for getting your hands on Forex Candlestick Magic. You are about to

take your skills in trading to a whole new level.

In my opinion I have found that Candlesticks are one of the most reliable

indicators that is available in the market and are truly versatile. They can

apply to any market such as Forex, stock, commodity etc.

So, naturally anyone who wants to make a living by doing trading, needs to be

aware of this indicator.

What inspired me to write this manual is that in my interaction with a lot of

traders, I felt that they have a lot of misconceptions about candlesticks. Some

are infact too scared to use it.

So, in this manual, I am trying to quash all pre conceived notions. My attempt

will be to present the candlestick details in a simplistic manner that can

understood by everyone.

Also, in almost each section, I am presenting some hidden secrets

related to candlesticks that can be learned only after years of

experience.

These tips itself will pay you way over what you paid for this manual!

Some of the tips are being shown in the box as shown below –

Note: This section will mention some tips!

Now, let me also mention what is your set of responsibilities.

1st and foremost, you must make sure that you give the due importance to this

manual by going through it completely and also watching the accompanied

videos.

Next, try to implement the knowledge you gained and techniques mentioned to

your daily chart analysis. In the beginning, it will take a day or may be two for




you to get used to analyzing candlestick. So don’t be too hard on yourself in the

beginning.

But once you get used to it, analyzing candlestick and related patterns will

become integral part of your trading carrier!

So, welcome to the world of Candlesticks.

Now, get started!!

Thanks & Take care,

Rahul

[email protected]




1. Technical Analysis Basics

I won’t spend too much time on covering technical analysis basics section since if you are reading this book, I assume that you know what technical analysis is.

To touch briefly, there are two methods for analyzing the foreign current market:

• The fundamental analysis

• The technical analysis

The Fundamental Analysis is based on the overall economic, social and political scenario of different countries, which influences the price movements and thus affects supply and demand.

One prime example of how the fundamental analysis impact the forex market is the release of “Non Farm Payroll (NFP)” which tells the employment related details of US economy and which gives forex market clear idea what economy outlook will be and what will be the strength of $$.

Infact, since we are talking about fundamental announcements, let me mention

that the 2 most important fundamental announcements to watch out for are NFP

& FOMC. During each of these announcements, the market moves 150+pips in

15 seconds

The Technical Analysis on the other hand is based on the historical data of

price movements. In other words, it is the study of the past trend of a given

currency pair, which is used in forecasting the future prices.

Technical Analysis works on the principle that price movement itself speaks

about the current market and the trend it will follow. Investors make different

trading decision based on the historical price movements.

The historical data is available in the form of various charts. Apart from the

charts, there are other technical analysis tools and theories but charts provide

the easiest way to predict a market trend.




As expected, for an average trader, technical analysis is far more convenient

than the fundamental analysis because of the resource availability.

But, it is also worth mentioning the direction of the market at the broader level

is defined by the fundamentals of the economy. The technical analysis is more

about finding opportune time to enter and exit.

Note: My personal recommendation will be to use technical analysis but at the

same time be aware of the economic happenings. This will allow you to

understand how strong any given currency is and based on that you can judge

the direction of market and use technical indicators accordingly

So, this leads me to the topic of Candlesticks. Japanese candlestick charts are

by far one of the most popular technical indicators that you can come across.

2. Japanese Candlestick Charts

In simple terms, a chart displays the price movement in the market in a

graphical way. A chart reveals:

• The historical data on price movement

• The upward or downward trend in the market

• Market psychology

• Buyer-Seller interaction

So, in a nutshell a chart reveals the entire perspective of the market.

There are three major kinds of charts:

• Bar Charts,

• Candlestick charts, and

• Line Charts.




We are focusing only on the Japanese Candlestick charts in rest of this

manual.

Here is what a candlestick chart looks like –




3. The Mighty “Candlestick”!!

In forex market, it is safe to say that “a single candle is stronger than a mighty

sword!”

I dare to say that because you can learn and find out a lot of things about the

past and future direction of the market by just looking at the candles. And if

these are combined with other indicators, the profits that can be made by

trading can be very high.

A typical candle shows the opening, closing, highest and lowest price of a

market in a specific time period. So, a single candle on 1 hr chart represents

the price action in that hr. Similar for a 15 min. chart and daily charts and so

on.




Below are 2 terms regarding a candle that you must always remember –

1. Body of a Candle – The body of a candle is the rectangular form between

the closing and opening price range in a period. The major component of

a candlestick is the body, i.e. the part that forms the rectangular shape

between the open and close points.

2. Wick – A wick is the gap between the body and the high or low of the

candle. It is the “Thread shaped” part of the body. The top wick (or top

shadow) represents the high range of price and the lower wick shows the

low range of price. A wick is also referred as “Shadows”.

There are 2 variations of candlesticks –

A. Bearish Candle

When the closing is lower than the opening, the body of the candlestick is filled

with either black (traditional) or red color. Earlier it used to be called a filled

candlestick. Now it is called a Bearish Candle




As you can see above in the red candle that the body shows the price by which

the market has come down. The upper and lower wicks (also known as

shadows) represent the entire range of movement.

B. Bullish Candle

As expected when the closing is higher than the opening, the body of the

candlestick is blue or green. Previously, it was called a hollow candle when

shown in white color. Now it is just a bullish candle.

As you can see above, the wick on the top of the body of the candle is the

highest price in the period and the wick at the bottom shows the lowest price.

Above and below the candlestick's body are the ‘wicks', while the wick on the

top is the highest price and the wick at the bottom represents the lowest price

of that period.




4. Candlestick Charts

A. Basic of Candlestick

Over 200 years back, the Japanese rise traders developed the Candlestick

charts for market analysis. Much later, Steve Nison, (whom I consider a legend

when it comes to candlestick) learned the technique from Japanese forex

market traders and glorified this technical indicator in USA and UK!

The candlestick charts gained a lot usage because the candlestick charts are

visually more attractive and enable million of traders worldwide, to make better

market reading.

The bigger the body of the candle, the more bullish or bearish a candle is.

But, don’t ignore the wick. The wicks (also known as shadows) indicate a

very important aspect – the market fluctuation.

The topmost point on the upper wick is the high price of the period, while the

lowest point on the lower wick represents the lowest price of the period. If the

close price is higher and there is no shadow or wick at the end, it says that the

close price is the highest price. And such a candle is considered as a pure

bullish candle.

Let me ask you, if you see a pure bullish candle, what psychology of the market

does it represent?

1. 1st and foremost, it would mean that there are huge chances that buyers

have the control over the market. And the strength of sellers is weak.

2. If previous candles were bearish candle, this candle could also mean that

the market MAY have hit some form of support and this could be point

where trend has started reversing.

(We’ll cover the 2nd aspect in more detail in the “Candlestick Patterns” section)




Vice-Versa for the bearish candle!

Oh, I forgot to mention that when analyzing any particular candle, also check

how long is the body of the candle.

Based on the length, different conclusions can be drawn.

Here is what I mean (Assume the wick size is negligible) –

1. If the length is small (How much is small, How much is large, I’ll come

back to this point later), the candle should be ignored since it would

mean that the forex market is just quite. This form of candles is seen

during outside US and UK trading sessions.

2. If the body is of significant size, for a bullish candle it could mean that

the buyers have control and market is in uptrend. And it may be time to

apply a trading system to enter a trade or in some cases, it may be time

to exit a trade.

This is the kind of candle that will influence our trading decision.

3. If the size is very large, it could be because some fundamental

announcement broke out. For example, whenever Non Farm Payroll news

come out, an average candle is atleast 150 pips in size.

Another example is whenever there is some major storm warning in US,

the $$ tanks. (Sorry to bring such an example, but to most of the readers

this example will be much easy to understand)

Refer to the chart below -




As you can see in chart above, the candlestick A is extraordinarily large and

doesn’t reflect trend of any form since after that the market started retracing.

This candlestick we because of fundamental announcement related to housing

market.

Candle B is of right size from trading point of view and should be used in

technical analysis.

Candlestick C is just too small.

I am sure you might be wondering, how do you identify which is a big candle

and which is a small candle?

To, be honest, it is dependent on time frame.




So, a large candle on 15 min. chart is small candle on a daily chart. While a

medium sized candle on a 1 hr chart could be an “extra-large” candle on a 15

min. chart and so forth.

To help you decide on size of the candle, let me give you some approximate

numbers of pips that I consider in deciding if a candle is small/medium/large

Chart Time Frame Candle type Pips Range

Small <10 pips

Medium Between 10 to 25 pips

Large Between 25 to 40 pips 15 min chart

Extra Large > 40 pips

Small <20 pips


Large Between 40 to 60 pips 1 hr chart


Small < 60 pips


Large Between 100 to 150

pips

Daily chart


Note: Which candle to use in your trading system is highly dependent on your




money management guidelines.

But, I would advice you to ignore the small candles as they mean the market is

stagnant. Also, the large candles can be result of some fundamental

announcement, so you want to use those in your system very judiciously.

Candles work very well in groups. By looking at the group of candles, you can

fairly predict what can happen next.

To understand the important “group candle formations”, you need to

understand some of the common single candle patterns. And that is what is

covered in next section.

But before that, let us check how much you have understood, through a mini-

test!

Check Your Understanding

Choose the correct answer:

1. The body of the candlestick does not show:

a. The highest and lowest price

b. The opening and closing price

c. The price range

2. The shadows of the candlestick show:

a. The highest and lowest price

b. The opening and closing price

c. The price range

3. If the close is below the open, it results in

a. A bullish candlestick

b. A bearish candlestick




c. A doji

4. If the close is above the open, it results in

a. A bullish candlestick

b. A bearish candlestick

c. A doji

5. The top of the upper shadow is

a. Opening price of the period

b. Highest price of the period

c. Closing price of the period

6. The bottom of the lower shadow is

a. Opening price of the period

b. Closing price of the period

c. lowest price of the period

7. When the price increases, it is a

a. bullish market

b. bearish market

c. none of the above

Guide to answers

1. (a), 2. (c), 3. (b), 4. (a), 5. (b), 6. (c), 7. (a)




Single Candlestick Formation Speaking of single candle formations, there are 100s of them. Infact let me tell

you a very interesting incident that happened just a few days ago.

One of my trader friends, who just started trading 4-5 months ago, he started

learning candlesticks and some other technical indicators.

After few weeks I asked him, how comfortable have you become with the

technical analysis?

This is what he said –

“I am still learning candlesticks. Man, there are so many formations that I have

to remember! How did you learn?”

To this, all I said to him was – “If you start learning all of the patterns, it will

take months. Just learn and understand the important ones. You don’t have to

go through all of them”

And I meant it!

Learning all the formations will simply overload you and after sometime you

will just confuse yourself when analyzing the charts.

So, in this section, I have mentioned some of the formations that occur more

frequently than the others.

So, Let us discuss each of these formations –




A. Marubozu Candles

Most common form of candle is one that has a body and wicks on both ends.

Marubozu candlesticks are bullish/bearish candles with bodies with no

shadows/wicks.

In case of a Bullish Marubozu, the open price is the same as the lowest price

and the close price equals the high price. It indicates the start of a strong

bullish trend or a bullish trend reversal. On the basis of our previous

discussion, you can expect that it depicts buyers’ control over the market.

In the bearish Marubozu, the open price equals to the high price of the trading

period and the close equals to the low price of the period. It indicates the start

of a strong bearish trend or a bearish trend reversal. It depicts sellers’ control

over the market.




B. Doji & Spinning Top

Doji candlesticks have extremely short bodies. Infact in most of the cases, a

true doji will have the same open and close price. So, in such candles, the

bodies of doji candlesticks appear as a thin line. And there will be wick on both

ends.

Remember, this is a very important single candle formation. You will often find

that appearance of a doji, when combined with other indicators may hint that a

trend reversal is about to happen.

A doji represents big indecision in market. So, this is something to watch for.

Note: A doji on a daily & 1 hr chart holds a lot of importance and a lot of

traders exit their open trades or adjust their stop loss when they see one.

But, don’t worry about its presence on a lower time frame, such as 15 min.

chart.

As I was telling you when you spot a doji on a chart, give more attention to the

previous candlestick formations.

On the same lines is Spinning top..




Spinning top candlesticks have a small body with long upper shadow and

long lower shadow. So, it is very similar to a doji but has a comparatively

bigger body. This pattern also indicates the indecision between the buyers and

sellers.

One key aspect of a spinning top is that it has large wicks. This is important

since it means that even though the market has liquidity, the buyer and sellers

are trying to gain upper-hand over each other.

So, in that sense, the next candles after a spinning top or even in doji are

always to be watchful for.

Here is an example. Look at the chart below –




This is a GBP/USD 1 hr chart.

The last candle marked in Red circle is a spinning top. Infact the body of this

candle is so small that it can even qualify as Doji.

What would you have done after hitting a spinning top in uptrend?




Traders who didn’t adjusted their stop loss after that Spinning top, would have

suffered some huge losses!

AIP - An Important Point! ☺☺☺☺

As we saw above, the spinning top signified that the market is losing the

bullish momentum and it was followed by a bearish strong trend.

So, does it mean that you should close your trades each and every time such

candles are seen?

No, absolutely not! No doubt the candles give you a very good idea about the

market and are very precise in terms of telling what can happen next, but to

take any decision, you must also use some good confirming indicator

Or atleast definitely watch for the next candle or so to confirm your decision.




**If you want to know if some good systems that use candlestick to great

advantage, wait till the end of this manual.

C. Hammer

Hammer on the other hand, has a short body with a long lower shadow and

short or absent upper shadow. As in the case of previous formations, hammer

also you should study this formation in relation with the previous price

activity.

Here is how to read a hammer - The hammer is a bullish reversal pattern that

forms during a downtrend. It indicates that the market is hammering out a

bottom.

Here is an example –




The chart above shows perfect a perfect example of Hammer. Both Candles A

and B signify that the bears are losing the momentum and buyers have started

seizing control.

Look at candle C. Does it look like a Doji? ☺

When there had been a downtrend, appearance of a hammer indicates that the

bottom is near and prices will start rising. The long lower shadow shows that

though the sellers pushed the price down, the buyers could get the price up

and closed near the open.




Note: Color of the hammer is not significant. It could be bearish(Red) or bullish

(Green). Just the wick should be large to categorize the candle as a hammer!

How would you recognize a hammer:

• The long lower shadow is about two or three times of the real body.

• Absent or very short upper shadow.

D. Hanging Man

The hanging man looks exactly same a hammer but bears a very different

meaning since it occurs at totally different point in a trend.

Like hammer, hanging man is also a short body with a long lower shadow and

little or no upper shadow.

But, a hanging man appears during an uptrend. And so, the hanging man

represents a bearish reversal pattern.




If you think what would have happened between buyers and sellers during a

hanging man, you can realize why it is important and what can be its

consequence.

During an uptrend, the formation of a hanging man indicates that sellers are

starting to gain control over the buyers. The long lower shadow shows that

sellers pushed prices lower during the session and though, the buyers pushed

the price up, it could only reach the open price. It shows buyers are exhausted.

E. Bearish Reversal Candlestick pattern

This bearish pattern is made up of a small body with a long upper wick during

an uptrend.




Alright, so what have we covered so far?

1. We looked at what is candle. We looked at the basics as well as its

components.

2. We looked at what are the different forms of single formation candles

such as Doji, shoorting star, hammer etc.

So, it is safe for me to say that you are already ahead of 40% of traders in the

market since now you know what the occurrence of a particular candle can

mean in the overall trend.

Now, it is time to raise the skill to a next level by looking and understanding

what a group of candles tell us.




You see, if a single candle contains so much information, how much can we

find out about the market by looking at the bunch?

All this and more in the next section.




Relative Candlestick Formation

Now we’ll take a look at formations that are more close to common

understandings. These are formations which are based on occurrence of

candles in a particular fashion. We’ll refer to them as relative candlestick

formations.

The relative candlestick formation indicates the trend, bullish or bearish; and

more importantly, when a trend is going to reverse.

A single candlestick also tells about price reversal; however its accuracy

increases manifold if the analysis is done by combining it with other candles,

which is what is relative candlestick formations.

Here is an example

Does it tell you a bullish market or a bearish market?

Well to some it may look bearish..

But, may be they all will change their mind when they look at the “Big Picture”




So, with this background, let us look at common patterns based on group of

candles.

To begin with we’ll look at an interesting phenomenon called “Support and

resistance blast”

A. Support and Resistance Blast

This in no doubt is one of my favorite patterns. Like I mentioned above, the

candlesticks work very well as groups. Its evidence is seen when the currency

pair price reaches a particular support and resistance level.

Here is what I mean.




Market moves in form of waves. Up and down. It moves in trend, then retraces

and then resumes the trend again.

During all these movements, it creates some levels which denote a good

support level or a good resistance level.

When you are looking at any chart, there are two questions that come to

everyone’s mind –

a. How do you identify a good support/resistance level?

b. What would the currency pair do when it approaches a already

established support/resistance level again?

The answer to both the questions is in - “candlestick formations”

Take a look below




As you can see in both the highlighted places, price simply retraced from a

common point establishing a clear resistance level while it bounced from same

point, forming a support line!

Now let us look at what will happen when currency pair approaches the

resistance level again -




As you can see above, the market hit the resistance again, forming the blue

candle, but the next Red candle was a much bigger candle and this indicated a

clear reversal.

So, catching this blue and red candle on time would have helped any trader to

exit an open trade and maximize the profit.

Tell me, how many other technical indicators are out there which are as reliable

as candlesticks?




B. Candle Eating Candle

Have you ever seen one candle eating another? I am sure you have, but may

not have realized. But going forward, you may want too..:-)

Here is what I mean, as you can see in the chart above, one candle is eating

another with a big mouth.

This is noticeable since it denotes that even though the 2nd candle opened

lower than the 1st, still the market has so much momentum in opened direction

that the 2nd candlestick closed above the high of 1st candle and so indicating

that the trend has reversed.

So totally eating it,

And later, as you can see, the market witnessed a strong uptrend.

Knowing this easily allows any trader to decide if it is time to get out of the

trade and book profit or keep the trade open by adjusting the stop loss.




Speaking of stop loss, let me touch on something here -

C. Placing Stop-Loss

If you have been familiar with my trading systems as given in Forex Success

Formula and Forex Profit Farm, I am sure you would have known how big a

supporter I am of money management

…and so of using Stop Loss.

I am sure all the expert traders use it else you are taking a huge risk and are

simply gambling!

But, even though some traders want to place the stop loss, they struggle at the

point deciding, where should they place it.

And even bigger question is how should the trailing stop loss be managed?

There are two major ways in which trailing stop loss can be managed –

1. Trailing stop loss can either be set to move after pre-defined number of

pips, such as after every 25 pips profit, stop loss can be moved by equal

number of pips in the direction of trade.

2. 2nd approach is based on placing the stop loss below the candles that are

going with the trend.

Refer the chart below to understand what I mean.

<<Chart showing the trailing stop loss below candle>>

As you can see we kept moving the stop loss by adjusting it below the

candles that are moving in the direction of the trade. This will ensure

that we stay in the trade for as long as the trend continues.




Continuing with the candlestick patterns…

D. Morning Star

Before discussing the Morning Star and Evening Star formations, let us

understand what is a “Star Pattern” and what is a “Raindrop” pattern.

A star is formed when a short body candlestick appears above a long (bullish)

white candlestick. A raindrop is just the opposite, i.e., in this case, a short

body candlestick appears after and below a long black (bearish) candlestick.

But please understand one thing that, both these formations show a trend

reversal and are important when, studied in a wider context.

So, with this background, we will now look at few patterns, which basically

provide these in wider contexts.




A Morning Star is formed, when during a downtrend a short bullish body

candle appears after a long bearish body and this is followed by another bullish

body which confirms the trend reversal.

Can you tell me why is this considered to be a strong trend reversal signal? Can

you think from Market’s perspective?

Think for a minute! The answer is all about the psychology of traders!

You see, a bearish candle followed by a small bullish candle means that buyers

have shown some kind of resistance to charging bulls and have won the battle

to small extent.

But the next bullish candle means that now Bulls are taking control of the

market! So this is a very good sign of trend reversal.

Like I said above, start thinking of market as a person. When you do that,

the candle formations will start making more sense!

Remember, a morning Star appears during a downtrend. You can easily

identify this pattern, which is a beacon of good days.

A little variation of the Morning Star is a Morning Doji Star. A morning Doji

Star is similar to a Morning Shooting Star and it also indicates an uptrend i.e.,

a bullish trend reversal after a downtrend. The only difference is, instead of a

short bullish body, a doji is formed after the long bearish candle.




E. Evening Star

An Evening Star is just the opposite of Morning star. It is formed, when during

an uptrend a small candle appears after a long bullish candle and is followed

by a long bearish candle, which confirms the bearish trend reversal. This is a

clear cut indication that market sentiments have turned bearish.




Note: In my personal experience I have noticed the Morning and evening stars

to be more than 65% accurate. So, this is definitely one of those setups that

you should always keep an eye on.

So far we have looked at a lot of candle formations. Ones that matter a lot! Now

it is time to see who they are used in real life charts. I am sure you are going to

enjoy next section a lot!




3. Profit-Machine “Real Life” Pattern

Formations

Net-Net, there are two kinds of chart patterns:

• Trend continuation patterns and

• Reversal patterns.

Some of the common Trend continuation patterns are – Triangles (Ascending,

Descending, Symmetrical and Broadening), Flags and Pennants, Wedges and

Rectangles.

The reversal patterns are – Head and Shoulders, Double Tops and Bottoms,

Triple Tops and Bottoms and Saucers.

**Out of these, there are certain patterns which are almost sure shot way to

make money because they are formed just before market is about to make huge

move!

So, let us look at these important Profit-Machine “real life” candle formations.

A. Double Top & Double Bottom

Double top is the one of the most common and one of my favourite reversal

patterns. You’ll be amazed to see how accurate it is.

Double Top is formed after an extended uptrend. It is a straightforward and yet

a very accurate pattern which you can easily recognize it on a chart. A market

in an uptrend often shows a series of increasing highs and relatively higher

lows. If the market on one of its high points does not move above the previous




high, but rather remains at the same price, that indicates weakening of the

trend a probable reversal.

This formation is a double top, where the price bounces from the same point.

The “tops” are highs formed when the price reaches a level and does not go up

anymore. After reaching this level for the first time, the price comes down a

little and again returns back to the same level, forming a double top.

The following chart shows a double top pattern formation.




The above example is more like a triple top, but the concept is the same. As

you can see that the market later reversed.

So, now onwards whenever you figure a double top, what would you do?

Ofcourse you would be ready to open a short trade.

Note: Please note that Double top is not a price point. It is a price range. So

if the 1st time currency pair showed resistance at lets say 1.1050, it doesn’t

mean that the next time the currency pair will again reverse at exactly 1.1050.

The market can reverse at 1.1040 or 1.1060 etc.

A lot of traders make a very common mistake when dealing with double tops.

Double bottoms are opposite of Double tops and are equally accurate.




This formation naturally occurs during a downtrend. In a downtrend, the price

reaches the low level twice but fails to break through, forming a double bottom

pattern.

The following chart shows a double bottom formation.




B. Cup and Handle Pattern

This is a very interesting formation but so to speak will require some level of

experience to identify.

The cup and handle pattern is a variation of the double top. It generally starts

taking form during an uptrend. After an upward move, for some time the price

stalls and sellers dominate the market. It results in a decline of 20 -50 percent

and then the prices rise again to almost the previous high followed by a second

decline of 8 - 20 percent

So basically the first decline and the subsequent rise together form the cup and

the second phase decline forms the handle of the pattern.

You will often find this pattern followed by a breakout to fresh new highs.

Note: More often than not you’ll find that the cup formation during 1st

retracement gets support at 38.2 or 50% Fibonacci levels. They hardly reach

the 61.8% fibs level.

When the price falls for the first time, it makes the market indecisive for a little

while. No clear trend could be visible and traders trade flat during this time,

making the base of the cup.

Again the currency pair goes up and reaches the preceding high. After reaching

the previous high, again the market falls a little, forming the handle of the

pattern. This is a relatively smaller downtrend and lasts for less time.

And in the end, the market breaks the stranglehold and starts the uptrend very

strongly.




Of course, the well-informed traders stay. A sharp cup would show weakening

trade and not a proper consolidation. Depending upon the market volatility, a

traditional cup and handle pattern should be from one-third to half the size of

the previous uptrend.

Like I mentioned above, identification of a cup and handle pattern will require

some experience. But let me tell you this, the cup and handle is a time-tested

pattern!

C. Consolidation-Explosion Pattern

There was a time when Consolidation Explosion pattern used to be very-very popular and infact people used to make their living by just trading this pattern. But, over a period of time people started losing their interest. However that doesn’t mean that the Consolidation-Explosion pattern is not effective. It is still as effective as it used to be.




This pattern basically represents a consolidation period after a fast moving trend. It is a pattern formed by two parallel lines sloping against the trend. The following chart explains the formation.

As you can see above, there was a downtrend, followed by a consolidation

period as marked in red lines and once those red lines were breached, the

market resumed the trend again.

It is as if a jogger starts running, then stops in between to catch the breath

only to resume jogging again.




D. Triangle Formation

As you already know that the market will not always follow a distinct uptrend

or downtrend. In fact, it is influenced by a lot of different factors. Many times,

you will find the market to stand still and then continue with the previous

trend.

This nature of market is quite visible in the Triangle formations.

In case of such formations, the price generally moves in one direction before

reaching a support or resistance level. Then it consolidates for some period and

forms a continuation pattern. Next, the price breaks through the support or

resistance level and continues in the direction of the previous trend.

There are three main types of triangles:

1. Ascending

2. Descending and

3. Symmetrical.

Ascending triangles generally occurs in an uptrend and indicates a

continuation in the upward movement of price. The lower trend line of the

triangle moves upward with time. The upper trend line is straight which

represents a resistance level. So over a next few candlesticks, you would find

that the currency pair price really gets compressed. It is more like the market

has its back to a wall and there is a bar which is trying to compress it even

more.

So, as the human nature goes, in such conditions there are only 2 possibilities

– Either the wall in the back will break or the market will break the bar which

is pushing it.

In ascending triangles, the resistance line is broken and the uptrend resumes.

Therefore, this offers an opportunity to buy.




The following figures explain the scenario in an ascending triangle formation.

The trend line is showing a resistance level. Price could not reach the level. It

indicates a consolidation and signals a continuation in the uptrend.

Once the price breaks through the consolidation, there will be continuation in

the previous uptrend.




The descending candles are just the inverse of the ascending ones. The lower

or support line is the straight line, while the upper line is slanting. When the

currency pair breaks through this trend line, it indicates that the sellers have

the control in the market and there would be a continuation in the prevailing

downtrend.




Refer to the chart above which is of EUR/USD currency pair.

As you can see, there is a strong support level and the price can’t break

through this support line even after multiple attempts.

But, what will happen once the channel was broken?

Once it breaks through the support line, the downtrend will be continued and

infact it continues very strongly.




Just imagine how much profit can be made when such breaks are caught?

The last triangle formation is the symmetrical triangles that have both the

trend lines converging in.




In such conditions, it is common that the market can break on either side. But

typically it is towards the line which is comparatively more horizontal.

Note: When the triangle formations are broken the market move very strongly.

Its because as the channel becomes narrow and narrow there is so much

energy that gets buildup and remains trapped that when the channel breaks it

gets released and pushes the market to a strong trend.

E. Hit Hit Hit and Return!!

This is more like a condensed version of triple top or something like that. In

this formation, the market keeps hitting a particular point to break it, but

couldn’t.

So, after few attempts, it reverses in direction and moves the other way.




Here is an example –

In the example above, the red ellipse represents numerous occasions when

market tried moving up, but it couldn’t and continued retracing from the

same high.

Later it was left with no choice other than to move in the other direction.

But here is another thing; this attempt established a resistance level. The

market approached that resistance level again and tried breaking it as

marked by candles in green ellipse.




This is a clear Double Top formation!!

Notice, how “Wicks” are allowing us to understand that the currency pair is

facing resistance.

F. Channels

Many times a trending market moves between parallel support and resistance

levels. This forms a price channel between two parallel lines. The following

chart shows such a channel.




The above chart shows another example of uptrend channel formation.

As you can see, currency pair was bouncing between the upper and lower

channel lines.

But the 1st elipse showed the place where channel was broken.

In most of the cases, when this happens, the currency pair tries again to go

inside the cases, only to be rejected this time (as seen in Red Ellipse)

But how can you use this channel?

The answer to this is that there are 2 ways –

1. Either you trade inside the trend lines. This means that since the market

is oscillating between the trends, you can open the trade when market

bounces from one trend line and put the target as the value of next trend

line.

Note: If you use this strategy my personal suggestion will be to not trade

against the trend, otherwise the trade will be just too risky.

2. Wait for the channel to be broken. Once the channel is broken, feel free

to open the trade.

G. Head and Shoulder Pattern

The Head and Shoulders pattern is very clearly distinguishable pattern. The

reason it is so popular because it provides a clear signal and precise entry

points to the traders. And along with it, its accuracy is very high.

Here is the fundamental behind head and shoulders –




In an uptrend the pattern is formed when, there are three relative highs. The

first and the last one are of nearly equal height and are called the shoulders of

the pattern. Infact in a true head and shoulder, the last high is slightly lower

than the 1st high.

The middle one tops above the shoulders and so is called the head of the

pattern. The relative lows in between the head and shoulders form a neckline

at the base of the pattern. So ideally the lows the 2 shoulders and 1 head rest

at the same level.

The pattern is formed because the neckline provides a strong support. The

market can take either direction from here, i.e., take a downtrend or uptrend.

But more often than not, I have seen that downtrend is more prominent for

trading in such a scenario and 8 out of 10 times the support gets broken.

The following chart shows a head and shoulder formation.




As you can see above, there were clearly 2 shoulders and 1 head. This is a

perfect case because the 2nd shoulder is equal or lower than the 1st shoulder.

Once the neck line was broken, it was all downward market!

The reverse head and shoulder is just the opposite of this. It occurs in a

downtrend. The head and shoulders are lower prices here and the neckline

offers a resistance level. Although the market may take either direction, 8 out

of 10 times, the resistance is broken.




Its time for a small quiz to check your understanding -

Check Your Understanding

Choose the correct answer:

1. Which of the following is not a continuation pattern?

a. Triangles

b. Flag and Penants

c. Head and Shoulder

2. Which of the following is not a continuation pattern?

a. Double top and bottom

b. Wedges

c. Rectangles

3. Support levels are prices beyond which

a. Buyers have shown or are likely to show strength

b. Sellers have shown or are likely to show strength

c. Both parties have shown or are likely to show strength




4. Resistance levels are prices beyond which

a. Buyers have shown or are likely to show strength

b. Sellers have shown or are likely to show strength

c. Both parties have shown or are likely to show strength

5. Which of the following is not a distinct phase of a major trend?

a. Accumulation

b. Public Participation

c. Speculation

6. Double top is formed after

a. An extended uptrend

b. An extended downtrend

c. None of the above

7. When a double top occurs, one should

a. Sell below the neckline

b. Buy below the neckline

c. Do none of the above

8. Cup and Handle generally takes form during

a. A downtrend

b. An uptrend

c. When the price stalls

9. Flag pattern indicates

a. Consolidation

b. Uptrend

c. Downtrend

10. If a price channel is formed during an uptrend, you should pay

attention to

a. Support line

b. Resistance line

c. None of the above

Guide to answers




1. (c), 2. (a), 3. (a), 4. (b), 5. (c), 6. (a), 7. (a), 8. (b), 9. (a), 10. (a)

What have we covered so far?

Wow!! We have covered a lot of stuff till now.

Let us recap what we have looked at –

1. We looked at the basics of a candle. What are the made of. What are their

components. What is importance of candlestick. What do they signify etc.

2. We also touched on the basic single candle formations. We covered the

dojis, hammer, hanging man and other interesting pstterns

3. Next is the group candles. We looked at Morning star, Evening star,

Engulfing patterns and Harami

4. And then we looked at the real life scenario of candlestick patterns. Here

is where we saw how the head and shoulder patterns are identified and

taken advantage of. What are the triangle patterns, double top, double

bottom patterns etc

So, in all we have covered certain things that most people don’t know even after

months of experience.

But the bigger thing is that we went through only the patterns that

matter a lot. I know there are thousands of patterns out there. And

learning all of them would have exploded heads of lots of traders!

But, we are not done yet. We need to go through some factors that

you should be aware of when using candlestick!




5. Important Points to Remember while

using Candles

Candlesticks no doubt, are one of the most reliable technical indicators and

when used correctly, it gives the traders the needed edge to generate huge

profits.

But there are some important aspects that should always be kept in mind

when using candlesticks –

1. If there is bullish candle that has good sized body and long wick, it

can still be considered a bullish candle during an uptrend. But the size

of the body should be good sized for that particular time frame chart.

2. There are certain points when generally the candles will behave in a

typical fashion. For example, the when the market approaches 200

EMA, you can expect the market to receive certain level of

support/resistance. If that happens, you can use that as a good

indication to close an open trade.

See the example below –




In the chart above, red line represents 200 EMA. See how the market

reliably finds good support or resistance.

3. The interpretation of candle becomes more and more effective as

the time frame of the chart increases. So, the accuracy of candlestick

patterns on a daily chart is higher than that on a 1 hr chart which is

more accurate in comparison to a 5 min chart.

4. Candlestick will give you a very good and reliable indication of the

market status. But I would advise to also use a confirming indicator

alongside before taking any trade decisions.

5. As much you pay attention to size of the body of the candle, pay

equal importance to size of the wick since it defines who is currently




stronger – buyer or seller. So with candles with equal body size, but one

with large wick and other with small wick mean two complete different

things.

This is all you needed to master the candlestick which will help you become a

much better trader and also will put you on the path to join the elite group of

10% of traders who make profit from trading forex.




6. A Common mistake – The one you

must avoid..always!!

When using candlesticks during chart analysis, wait for the candle to

close before deciding if you should trade or not. For example, if you are

looking at a 1 hr chart, wait for the end of the hour so that the current 1 hr

candle has closed. That is when you’ll find the true and accurate

information to decide if you should take any trade related decisions or not.

A lot of time you’ll see that for the 50 min in the hr, the candle looks to be

bullish and you would think of opening a “Buy” trade, but in that last 5-10

min, the market will loose a whole lot pips and this impacts the entire trade

decision.




Look at the above chart on EUR/USD 15 min. chart. The candle marked in

the ellipse has a large wick and a large red body.

But you know what, during the first 12 min of this 15 min candle, the entire

candle was “Green”. It turned RED only in last 3 min.

So, if anyone who would have taken a trade decision without waiting for the

candle to close, would have made an incorrect decision.

So always wait for the candle to close before taking a trading decision.

7. What’s next?

The next thing would be to open a particular chart and see any familiar

patterns. Infact if you are serious about trading, you must keep your eyes

open and look for any familiar candlestick patterns

If you do this, you’ll start seeing a good improvement in your results after as

soon as few days.

If you own a copy of my systems Forex Success Formula or Forex Profit

Farm, apply the candlestick principles and start tracking your trades

through the log template that I have provided. You’ll find that the accuracy

of your trades has increased.

Incase you don’t own them, you can go here and get your copy at a sweet

discount -




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Also, since you have bought Forex Candlestick Magic, I have setup a

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Use the link below –

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What more to say?




8. Closing Notes

If you are reading this section, then I must congratulate you for finishing this

manual. I am sure you would have learned some very important aspects of

candlesticks.

There are two kinds of traders – One who buy a manual and just go through it

without any intent of doing anything with it …

And the other who practice it!

I would prefer you to be the later one.

Now since you have got enough background of Forex candlesticks, I would

suggest you to start using it.

Print out this manual and use it as a reference.. You don’t have to learn each

and every detail. You just have to be aware of those and start noticing them on

the charts.

And like I mentioned above, keep a log of trades that you place from now on.

Most of you would notice a good improvement.

Also, feel free to reach out to me if you have any questions!

Happy Trading!

Thanks & Take Care

Rahul

[email protected]

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