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FOREX STRATEGIES EDUCATION

Welcome To Forex Strategies E-learning, in this page we only teach you how you can apply forex strategies in the forex market
Welcome To Forex Strategies E-learning, in this page we only teach you how you can apply forex strategies in the forex market

BEARISH JAPANESE CANDLESTICKS AND STRATEGIES 

Bearish Japanese

Candlesticks & Strategies

A guide to using this popular and trusted Technical Analysis tool Examples of Forex and CFD Strategies

Written by

Kingsley

(Head of EWEB)

Contents

01 Title page .........................................................................................

02 Table of Contents .............................................................................

03 History ............................................................................................

04 Introduction ....................................................................................

05 About the Author .............................................................................

06 Bearish Reversals ............................................................................

07 Bearish Strategies ............................................................................

08 Conclusion .......................................................................................

09 Disclaimer ........................................................................................

History

Japanese candlestick charting dates back to the 18th century in Japan, when it was used to trade the futures market. This method of price charting is attributed to Munehisa Homma, a highly respected rice trader from Sakata, who successfully traded Japan’s rice coupon (futures) market.

Homma realised there was a distinction between price and value in the market. He knew that supply and demand was the driving force behind any price movement, but he also believed that investors’ psychology and traders’ emotions influenced the price of rice. He knew that being able to gauge the market’s sentiment was imperative in order to succeed in trading. He researched years of historical prices and recorded the previous day’s prices (open, high, low, close) in a pictorial way that became known as Candlesticks. Homma used the Candlestick patterns to forecast the direction of the rice market. It was reported that he took 100 profitable consecutive trades!

Japanese Candlesticks were unknown to the West until the late 1980s when Steve Nison started writing articles that explained the new price charting method. His book, Japanese Candlestick Charting Techniques, unveiled the Candlesticks to western traders and investors.

Introduction

Understanding how to use and interpret technical analysis charts is a vital skill for any investor. Candlestick charts are one of the most popular charts in use - and for good reason.

Traditional bar and line charts need to be used in conjunction with other indicators to glean trading insights. Candlestick charts, however, display market movements in much greater detail. These insights into price action in financial markets allow an investor to use pattern analysis to determine future movements. After some practice and education, the use of Candlestick charts to perform pattern analysis can assist an investor to hone their trading strategies. Candlestick analysis is all about reversal and continuation patterns, but it also introduces another important element - market psychology.

Price movements are not only affected by tangible forces such as geopolitics and economics; hope, fear and greed also play a role in moving markets. Candlesticks allow you to read the changes in the market’s determination of value, also referred to as investor sentiment. Candlestick charts show the interaction between buyers and sellers, which in turn is reflected in price movements. This market sentiment is a unique attribute of candlestick charts, and not present in bar or line charts. Candlesticks as a charting method has recently gained a lot of popularity all over the world, because they are more visually appealing than bar charts and generally easier to read and interpret. The chart makes it easier to see the relationship between the open and close and the high and low of price movements. They also give a more accurate depiction of market sentiment. They provide an easy-to-identify set of formations that, used along with other indicators, give an investor a view of patterns that are emerging in the market.

There are two types of Candlesticks:

• The first Candle has a white or hollow body which indicates that the market is moving upwards as there is more buying than selling interest.  As the Close price is higher than the Open price, the white Candlestick depicts the positive sentiment in the market and the fact that bulls are in control. The longer the body is, the stronger the buying interest.

• The second is a filled (black) body which indicates that the market is moving downwards - this indicates that there is more selling than buying interest. As the Close price is lower than the Open price, the black candlestick depicts the negative sentiment in the market and the fact that bears are in control. The longer the body is, the stronger the selling interest.

The lines above and below the body of the candlestick are called “Shadows” or “Wicks”. 

The upper shadow reveals the price levels above the body that have been tested but eventually rejected. Similarly, the lower shadow reveals the price levels below the body that have been tested but eventually rejected.

There are over 60 different main patterns that underpin candlestick charting, however  you do not need to learn them all. This e-book serves as an introduction and reference guide to the meanings and uses of Bearish Candlestick formations. By the end of it you will have a holistic view of how to integrate this type of charting into your trading strategy.

About the Author

EWEB’s Head of Education, kingsley, is a respected FX educator and Certified Technical Analyst. He is a recognised authority in the forex industry, and renowned for his expertise in algorithmic trading. After years of consulting with EWEB on a number of key projects, Kingsley officially joined the company in June 2016 and is the principal driver and architect of EWEB’s extensive educational programme. His department’s international seminars and workshops provide clients across the world with on-location support, while his webinars, e-books, educational articles and videos form the cornerstone of EWEB’s multilingual, open access training resources. The training is tailored to traders’ needs by region and experience level.

Kingsley has played a key role in the development of forex education within the industry, training tens of thousands of traders and forex professionals around the world. Traders of all levels value his seminars and workshops for both content and his passionate and lively presentations. As Head of Education, Kingsley also plays a pivotal role in EWEB’s research and development team. In this capacity, he led the development of the EWEB Trading Signals and EWEB Pivot Points Strategy tools, which are designed to help traders spot potential trading opportunities across various trading instruments.    

Kingsley has been awarded a number of international professional certificates including: MSTA by the Society of Technical Analysts (UK) and CFTe and MFTA by the International Federation of Technical Analysts (USA) – the highest qualifications in the technical analysis community. He also holds a BSc and MSc in Computer Science from University of Louisiana at Lafayette and Bowie State University, respectively.

06 BEARISH REVERSALS

“FOLLOW WHAT YOU SEE ON THE PRICE CHARTS, NOT WHAT YOU WANT TO SEE.”

- Andreas Thalassinos

6.1   Long Black Body

6.2   Shooting Star

6.3   Belt Hold

6.4   Engulfing Pattern

6.5   Harami

6.6   Dark Cloud Cover

6.7   Tweezers

6.8   Three Inside Down

6.9   Three Black Crows

6.10 Evening Star

 

6.1 LONG BLACK BODY

A candlestick of a long black body that forms at the end of an uptrend, or at a resistance area. This has bearish reversal implications.

Meaning:

The prolonged rally brought prices higher to a point that caught the traders’ attention, triggering profit-taking and sell orders. As a result, the closing price is much lower than the open price signaling a possible end of the uptrend and new downward move.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish.

Trigger: Consider selling if next candle falls below the low of the long black body.

Color of the body: black

Range of the body: long

Range of the upper shadow: small or non-existence

Range of the lower shadow: small or non-existence

Location: End of uptrend or upward move

 

6.2 SHOOTING STAR

A Shooting Star formed at the end of an uptrend or at a resistance area has bearish reversal implications. Traders enter the market with long positions but eventually the sellers’ pressure overcomes buyers’ pressure and the candlestick closes at the lower area of the Shooting Star. The small body and the long upper shadow reveals the weakness of the bulls who are unable to maintain the upward move.

Meaning:

As buying pressure pulls prices to higher levels in the course of the upward move, bullish demand drives prices higher - rallying as a result of long positions. Even though the rally is not sustained, the shorts are not strong enough to drive the market lower.

Supply/Demand: Supply is greater than demand.

Sentiment: Neutral.

Direction: Bearish.

Trigger: Consider selling if next candle falls below the low of the shooting star.

Color of the body: black or white

Range of the body: small

Range of the upper shadow: 2-3 times the size of the body

Range of the lower shadow: Small or non-existent

Location: End of uptrend or upward move

 

6.3 BELT HOLD

It forms at the end of an uptrend or near a resistance area. The candle has a long black body, a small lower shadow and very small or non-existent upper shadow. The session opens near the high and closes near the low of the candlestick.  A long black body at the end of an upward move reveals the determination of the bears to push prices lower.

Meaning:

After a prolonged rally, prices reach attractive levels, triggering profit taking positions as a result of sellers entering the market. This causes supply that surpasses demand.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish.

Trigger: Consider selling if next candle falls below the low of the Belt Hold.

Color of the body: black

Range of the body: long

Range of the upper shadow: very small or non-existence

Range of the lower shadow: small

Location: End of uptrend or upward move

 

6.4 ENGULFING PATTERN

A long black candlestick is formed at the end of an uptrend, preceded by a small white candlestick.  The body of the small white candlestick is completely engulfed by the body of the long black candlestick. The bullish pressure of the prevailing upward move is overcome by sellers entering the market aggressively at the end of the rally. This forms a long black candlestick with bearish implications.

Meaning:

During the course of an upward move and while prices rally higher, the presence of a smaller white body signifies that longs have second thoughts on maintaining the bullish direction.  While the bulls show signs of weakness, the bears enter the market aggressively as they are lured by the attractiveness of high prices.  As supply is higher than demand, and sentiment shifts to negative, prices decline to lower levels.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish

Trigger: Consider selling if next candle falls below the low of the long black candle.

1st candle

Color of the body: white

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: Smallest a long black body

Location: End of uptrend or upward move. Precedes a long black body

2nd candle

Color of the body:  black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of uptrend or upward move.  Follows a small white body. The body of the small white candle is completely engulfed by the body of the long black candle.

 

6.5 HARAMI

A small candlestick body of either colour follows a candlestick of a long white body.  The colour of the small candlestick is not important. The bullish rally is running out of steam as shown by the presence of the small candle which signals uncertainty, as it is contained by the previous long body. The weakness of the market to push prices higher and the presence of the pattern at the end of an upward move, signals possible bearish implications.

Meaning:

After a prolonged rally, traders continue to trade in the direction of the prevailing trend until the market enters a phase of uncertainty, as traders are not willing to move the market higher nor lower at the moment. The fact that price action has been contained within the previous session’s open and close manifests reluctance to move higher and a possible bearish reversal.

Supply/Demand: Equilibrium.

Sentiment: Neutral.

Direction: Possible bearish reversal.

Trigger: Consider selling if next candle falls below the low of the long white candle.

1st candle

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow:  small

Location: End of uptrend or upward move. Precedes a small candlestick of small body.

2nd candle

Color of the body: white or black

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of uptrend or upward move. Follows a long white body. Body is within the range of the previous white candle’s body.

 

6.6 DARK CLOUD COVER

During the course of a rally, a long black candlestick falls below the midpoint of the previous long white candle. The black candle opens above the previous close or high.

Meaning:

Traders open long positions in the direction of the rally, as it remains intact. The opening of the next session confirms the bulls’ intentions, as the new candlestick gaps higher (either the close or the high price).  Bulls go with the direction of the upward move but the bears find prices attractive, entering the market aggressively with short positions.

The session closes with gains for the bears, who managed to close the long black candle well into the previous candle’s body.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish reversal.

Trigger: Consider selling if the next candlestick falls below the low of the long black candlestick.

1st candle

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of uptrend or upward move. Precedes a long candlestick of black body.

2nd candle

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of uptrend or upward move. Follows a long white body.  It falls below the midpoint of the previous body.

 

6.7 TWEEZERS

The market continues to trade in the direction of the established uptrend, registering higher highs.  The next session is bearish, pushing prices lower.  The matching highs indicate that a possible top may be in place and a reversal may be imminent.

Meaning:

During the course of the uptrend, traders enter the market with long positions, trading in the direction of the rally. While the sentiment is clearly positive, the next session belongs to the bears as they find prices attractive. While the battle between bulls and bears goes on, traders enter with long positions but are not willing to trade at a price higher than the previous session (thus matching highs), and take short positions to register a bearish candle and shift the sentiment to negative.

Supply/Demand; Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish reversal.

Trigger: Consider selling if the next candlestick falls below the low of the black candle.

1st candle

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: Precedes a candle (ideally smaller black) with matching high.

2nd candle

Color of the body: Any color (ideally black)

Range of the body: Any color (ideally small)

Range of the upper shadow: any size

Range of the lower shadow: any size

Location: End of uptrend or upward move. Follows a (ideally long white) candle with matching high.

 

6.8 THREE INSIDE DOWN

A small candlestick body of either colour follows a long white candlestick. The bullish rally is losing its strength as shown by the presence of the small candle which is contained by the previous long body.  The reluctance of the market to move higher, and the presence of the pattern at the top of the rally, signals possible bearish implications. The long black body that follows, extending below the second candle, confirms the bearish reversal.

Meaning:

After a prolonged rally to the upside, traders continue to trade in the direction of the prevailing trend until the market enters a phase of uncertainty, as traders are not willing to move the market in either direction at the moment. The fact that price action has been contained within the previous session’s open and close reveals reluctance to move higher - and a possible bearish reversal is indicated. The long black body that follows confirms that bears are in control and selling pressure overcomes buying pressure.  Entering short positions, sellers drive the market lower to eventually close lower than the previous session.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish reversal.

Trigger: Consider selling if next candle falls below the low of the long black candle.

1st candle

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of uptrend or upward move.

2nd candle

Color of the body: black or white

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: Follows a long white body. Body is within the range of the previous candle’s body.

3rd candle

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow:small

Location: Follows a small candlestick. It closes lower than the previous candle.

 

6.9 THREE BLACK CROWS

At the end of the uptrend, the presence of three consecutive long black candlesticks signifies the end of the upward move and the beginning of a new move in the opposite direction. Each Marubozu opens above the previous close and concludes below it. The lower shadows are very small if present - thus demonstrating the strength of the decline.

Meaning:

After a prolonged uptrend, traders enter the market aggressively with short positions, resulting in three consecutive long black candlesticks that close lower than each other.

Supply is clearly greater than demand and sentiment is negative - these factors drive the market to decline. The forceful control of the bears leaves the bulls unable to react, other than closing their long positions.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction; Bearish reversal

Trigger: Consider selling if the next candlestick falls below the low of the third long black candle.

1st candle

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small or non-existence

Location: End of uptrend. Open is higher than prior close. Close is lower than prior close.

2nd candle

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small or non-existence

Location: Follows a long black candlestick. Open is higher than prior close. Close is lower than prior close.

3rd candle

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small or non-existence

Location: Follows a long black candlestick. Open is higher than prior close. Close is lower than prior close.

 

6.10 EVENING STAR

A long white candlestick forms in the direction of the uptrend, confirming that the rally is still in force. The next session gaps higher, forming a small candle that signals indecision. A long black candle that follows pushes the market lower, well into the long white candle’s body, anda, more specifically, below its mid- point - indicating a bearish reversal.

Meaning:

Traders enter the market with long positions pulling prices even higher in the direction of the prevailing trend. The presence of a small candlestick at the top signals indecision and weakness amongst the bulls, who are running out of steam. Eventually, sellers’ pressure overcomes buyers’ pressure and the market rebounds and closes in the lower area of the long black candlestick.

Supply/Demand: Supply is greater than demand.

Sentiment: Negative.

Direction: Bearish.

Trigger: Consider selling if next candlestick falls below the low price of the long black candle.

1st candle

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of uptrend or upward move.

2nd candle

Color of the body: white or black

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: Follows a long white body. It gaps above the previous candle’s close. 

3rd candle

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small or non-existence

Location: May gap below the prior candle’s body.  It closes below the mid-point of the long white candle.

 

07 BEARISH STRATEGIES

“HE WHO KNOWS WHEN TO FIGHT AND WHEN TO AVOID A FIGHT WILL BE

VICTORIOUS.”

- Sun Tzu

 

7.1   Shooting Star, RSI and SMA (50)

7.2   Dark Cloud Cover, RSI and SMA (20) as Take-Profit Target

7.3   Harami with RSI filtering and SMA (50) as Take-Profit Target

7.4   Tweezers with RSI and SMA (20)

7.5   Long Black Body filtered by RSI and LWMA (50)

7.6   Three Black Crows filtered by CCI

7.7   Evening Star filtered by CCI and SMA (50)

7.8   Engulfing with Stochastics and LWMA (50)

7.9   Belt Hold with Stochastics and EMA (20)

7.10 Three Inside Down with RSI and SMA (50)

 

7.1 Shooting Star, RSI and SMA (50)

During an uptrend (or upward correction), the appearance of a Shooting Star filtered by RSI at the overbought area.

Consider selling when the next candle falls below the low of the Shooting Star. Consider placing a protective stop loss at the top (high) of the Shooting Star. Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close the position when the price reaches the SMA (50).

2. Close 50% of the position when price travels 100% the length of the Shooting                 Star’s range, then close the remaining 50% when the price reaches the SMA(50)

3. Other combinations may be applied.

 

7.2 Dark Cloud Cover, RSI and SMA (20) as Take-Profit Target

During the course of an uptrend (or upward correction), the appearance of a Dark Cloud Cover pattern filtered by RSI at the overbought area.

Consider selling when the next candle falls below the low price of the long white candle. Consider placing a protective stop-loss at the top of the Dark Cloud Cover. Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close the position when the price reaches the SMA (20).

2. Close 50% of the position when price travels 100% the length of the Dark Cloud Cover pattern then close the remaining 50% when price reaches the SMA (20).

3. Other combinations may be applied.

 

7.3 Harami with RSI filtering and SMA(50) as Take-Profit Target

During the course of a rally, the appearance of a Harami pattern filtered by RSI at the overbought area.

Consider selling when the next candle falls below the low price of the pattern. Consider placing a protective stop loss at the top of the Harami pattern.

Take Profit strategy is heavily dependent on the trading profile of each individual:

1. Close the position when the price reaches the SMA (50).

2. Close 50% of the position when price travels 100% the length of the Harami pattern then close the remaining 50% when price reaches the SMA (50).

3. Other combinations may be applied.

 

7.4 Tweezers with RSI and SMA(20)

During the course of a rally, the appearance of the Tweezers pattern filtered by RSI at the overbought area.

Consider selling when the next candle falls below the low price of the black candlestick. Consider placing a protective stop loss at the top of the pattern.

Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 50% of the position when price travels 100% the length of the pattern, then close the remaining 50% when price reaches the 200% of the pattern or at the presence of a reversal candlestick pattern below the SMA(20).

2. Other combinations may be applied.

 

7.5 Long Black Body filtered by RSI and LWMA (50)

At the top of an uptrend, the appearance of a Long Black Body filtered by RSI at the overbought area.

Consider selling when the next candle falls below the low of the Long Black Body. Consider placing a protective stop loss at the top of the Long Black Body. Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 60% of the position when price travels 100% the length of the Long Black Body.

a. Close the remaining 40% when price reaches 200% the length of the Long Black Body or prices reach the LWMA (50) or at the presence of a reversal candlestick, whichever happens first.

2. Other combinations may be applied.

 

7.6 Three Black Crows filtered by CCI

At the top of an uptrend, the presence of Three Black Crows filtered by CCI at the overbought area.

Consider selling when the next candle falls below the low of the pattern. Consider placing a protective stop loss at the top of the last black candle.

Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 50% of the position when price travels 100% the length of the last Long Black Candle.

a. Close the remaining 25% when price reaches the 200% of the length of the last Long Black Candle.

b. Move the protective stop-loss at the bottom of the pattern.

c. Close the remaining 25% of the position at the presence of a reversal candlestick or when price travels 300% of the length of the last Long Black Candle, whichever happens first.

2. Other combinations may be applied

 

7.7 Evening Star filtered by CCI and SMA (50)

During the course of an uptrend, the appearance of the Evening Star filtered by CCI at the overbought area.

Consider selling when the next candle falls below the low price of the third candle (black). Consider placing a protective stop loss at the top of the pattern.

Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 50% of the position when price travels 100% of the pips at risk.

a. Close the remaining 25% when price reaches the 200% of the pips at risk.

b. Move the protective stop-loss at the bottom of the second black candlestick.

c. Close the remaining 25% of the position at the presence of a reversal candlestick or when price closes back above the SMA (50) or when price travels 300% of the length of the pattern, whichever happens first.

2. Other combinations may be applied.

 

7.8 Engulfing with Stochastics and LWMA (50)

During the course of an uptrend, the appearance of the Engulfing pattern filtered by Stochastics at the overbought area.

Consider selling when the next candle falls below the low price of the pattern. Consider placing a protective stop loss at the top of the pattern.

Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 60% of the position when price travels 100% the length of the pattern.

a. Close the remaining 30% when price reaches the 200% of the length of the

pattern.

b. Move the protective stop-loss at the bottom of the pattern.

c. Close the remaining 10% of the position at the presence of a reversal candlestick or when price closes below the LWMA (50) or when price travels 300% of the length of the pattern, whichever happens first.

2. Other combinations may be applied.

 

7.9 Belt Hold with Stochastics and EMA (20)

During the course of a rally, the appearance of the Belt Hold pattern filtered by Stochastics at the overbought area.

Consider selling when the next candle falls below the low price of the pattern. Consider placing a protective stop loss at the top of the pattern.

Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 50% of the position when price closes below the EMA (20) provided that the distance travelled is at least equal to the length of the pattern.

a. Move the protective stop-loss at the middle of the pattern.

b. Close the remaining 20% when price reaches the 200% of the length of the pattern.

c. Move the protective stop-loss at the bottom of the pattern.

d. Close the remaining 20% of the position when price reaches 300% of the length of the pattern.

e. Close the remaining 10% of the position at the presence of a reversal candlestick or when price closes back above the EMA (20).

2. Other combinations may be applied.

 

7.10 Three Inside Down with RSI and SMA (50)

At the end of an uptrend, the appearance of the Three Inside Down pattern filtered by RSI

at the overbought area.

 Consider selling when the next candle falls below the low price of the Long Black Candle (third candle).

Consider placing a protective stop loss at the top of the pattern.

Take-Profit strategy is heavily dependent on the trading profile of each individual:

1. Close 60% of the position when price travels 100% the length of the pips at risk.

a. Close the remaining 20% when price reaches the 200% of the pips at risk.

b. Move the protective stop-loss at the bottom of the Long Black Candle.

c. Close the remaining 20% of the position when price reaches 300% of the length of the Long Black Candle or at the presence of a reversal candlestick or when price closes back above the SMA(50).

2. Other combinations may be applied.

 

Conclusion

Japanese Candlesticks are valuable technical analysis charts in a trader’s toolkit. Now that you have an understanding of how they can be applied to your trading decisions, take the time to see how they can be used with other tools to help hone your trading strategies. To recap, they help you to determine the state of the market at a glance, identify market patterns quickly, and help you see specific bullish and bearish reversal patterns that cannot be seen on other charts.

Technical Analysis is the only way one can determine market sentiment - it helps to shine a light on movements when the fundamentals of the markets have not changed. Candlesticks tell a story that other types of charts do not. Mastering Technical Analysis is a skill that improves over time, as long as you keep learning, refining and practicing.

 

 

 

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BULLISH JAPANESE CANDLESTICK STRATEGIES

Bullish Japanese

Candlesticks & Strategies

A guide to using this popular and trusted Technical Analysis tool Examples of Forex and CFD Strategies

Written by

Andreas Thalassinos

(Partner of EWEB)

Contents

01 Title page .........................................................................................

02 Table of Contents .............................................................................

03 History .............................................................................................

04 Introduction .....................................................................................

05 About the Author .............................................................................

06 Bullish Reversals ...............................................................................

07 Bullish Strategies ..............................................................................

08 Conclusion ........................................................................................

History

Japanese candlestick charting dates back to the 18th century in Japan, when it was used to trade the futures market. This method of price charting is attributed to Munehisa Homma, a highly respected rice trader from Sakata, who successfully traded Japan’s rice coupon (futures) market.

Homma realised there was a distinction between price and value in the market. He also knew that supply and demand was the driving force behind any price movement but he also believed that investors’ psychology and traders’ emotions influenced the price of rice. He knew that being able to gauge the market’s sentiment was imperative in order to succeed in trading.  He researched years of historical prices and recorded the previous day’s prices (open high, low, close) in a pictorial way that became known as Candlesticks. Homma used the Candlestick patterns to forecast the direction of the rice market.  It was reported that he took 100 profitable consecutive trades!

Japanese Candlesticks were unknown to the West until the late 1980’s when Steve Nison started writing articles that explained the new price charting method.  His book Japanese Candlestick Charting Techniques, unveiled the Candlesticks to western traders and investors

 

Introduction

Understanding how to use and interpret technical analysis charts, is a vital skill for any investor. Candlestick charts are one of the most popular charts in use -and for good reason.

Traditional bar and line charts need to be used in conjunction with other indicators to glean trading insights. Candlestick charts however, display market movements in much greater detail. These insights into price action in financial markets, allows an investor to use pattern analysis to determine future movements. After some practice and education, the use of Candlestick charts to perform pattern analysis, can assist an investor to hone their trading strategies. Candlestick analysis is all about reversal and continuation patterns but it also introduces another important element - market psychology.

Price movements are not only affected by tangible forces such as geopolitics and economics, hope, fear and greed also play a role in moving markets. Candlesticks allow you to read the changes in the market’s determination of value, also referred to as investor sentiment. Candlestick charts show the interaction between buyers and sellers, which in turn is reflected in price movements. This market sentiment is a unique attribute of candlestick charts, which is not present in bar or line charts. Candlesticks as a charting method has recently gained a lot of popularity all over the world because they are more visually appealing than bar charts and are generally easier to read and interpret. The chart makes it easier to see the relationship between the open and close and the high and low of price movements. They also give a more accurate depiction of market sentiment.  They provide an easy-to-identify set of formations that used along with other indicators, give an investor a view of patterns that are emerging in the market.

THERE ARE TWO TYPES OF CANDLESTICKS:

• The first Candle has a white or hollow body which indicates that the market is moving upwards as there is more buying than selling interest.  As the Close price is higher than the Open price, the white Candlestick depicts the positive sentiment in the market and the fact that bulls are in control. The longer the body is, the stronger the buying interest.

• The second is a filled (black) body which indicates that the market is moving downwards, this indicates that there is more selling than buying interest. As the Close price is lower than the Open price, the black candlestick depicts the negative sentiment in the market and the fact that bears are in control. The longer the body is, the stronger the selling interest.

The lines above and below the body of the candlestick are called “Shadows” or “Wicks”. 

The upper shadow reveals the price levels above the body that have been tested but eventually rejected.  Similarly, the lower shadow reveals the price levels below the body that have been tested but eventually rejected.

There are over 60 different main patterns that underpin candlestick charting, however  you do not need to learn them all. This e-book serves as an introduction and reference guide to the meanings and uses of Bullish Candlestick formations. By the end of it you will have a holistic view of how to integrate this type of charting into your trading strategy.

About the Author

EWEB’s Head of Education, Andreas Thalassinos, is a respected FX educator and Certified Technical Analyst. He is a recognised authority in the forex industry, and renowned for his expertise in algorithmic trading. After years of consulting with EWEB on a number of key projects, Andreas officially joined the company in June 2016 and is the principal driver and architect of EWEB’s extensive educational programme. His department’s international seminars and workshops, provide clients across the world with on-location support, while his webinars, e-books, educational articles and videos, form the cornerstone of EWEB’s multilingual, open access training resources. The training is tailored to traders’ needs by region and experience level.

Thalassinos has played a key role in the development of forex education within the industry, training tens of thousands of traders and forex professionals around the world. Traders of all levels value his seminars and workshops for both content and his passionate and lively presentations. As Head of Education, Thalassinos also plays a pivotal role in EWEB’s research and development team. In this capacity, he led the development of the FXTM Trading Signals and FXTM Pivot Points Strategy tools, which are designed to help traders’ spot potential trading opportunities across various trading instruments.  

Thalassinos has been awarded a number of international professional certificates including: MSTA by the Society of Technical Analysts (UK), CFTe and MFTA by the International Federation of Technical Analysts (USA) – the highest qualifications in the technical analysis community. He also holds a BSc and MSc in Computer Science from University of Louisiana at Lafayette and Bowie State University, respectively.

06 BULLISH REVERSALS

“A TECHNICAL ANALYST’S GOAL IS TO IDENTIFY THE TREND

IN ITS EARLY STAGES.”

- Andreas Thalassinos

 

6.1   Long White Body

6.2   Hammer

6.3   Belt Hold

6.4   Engulfing Pattern

6.5   Harami

6.6   Piercing Lining

6.7   Tweezers

6.8   Homing Pigeon

6.9   Three White Soldiers

6.10 Morning Star

 

 

6.1 LONG WHITE BODY

A candlestick of a long white body that forms at the end of a downtrend, or at a support area. This has bullish reversal implications.

Meaning:

The prolonged decline brought prices lower- to a point that caught the traders’ attention, who then entered the market aggressively at the beginning of the session pushing prices higher. The closing price is greater than the opening price, signalling a possible end of the decline and new upward move.

Supply/Demand: Demand is greater than supply.

Sentiment: Positive.

Direction: Bullish.

Trigger: Buy if next candle exceeds high of the long white body.

Color of the body: white

Range of the body: Long

Range of the upper shadow: small or non-existence

Range of the lower shadow: small or non-existence

Location: end of downtrend or decline

 

6.2 HAMMER

The presence of a hammer at the end of a downtrend or decline, alerts for a possible bullish reversal. Traders enter the market with short positions, pushing prices even lower in the direction of the prevailing trend, to form the lower shadow. Eventually, the downward move is proven short-lived, as bulls take control and manage to close the session at the upper area of the candle. This forms the real body, whose length is 2-3 times shorter than the lower shadow.

Meaning:

Traders trade in the direction of the prevailing downward trend, opening mostly short positions which drives the market even lower.  As prices fall, bulls find prices attractive and then enter the market aggressively with long positions.  The session eventually concludes at the higher area of the candlestick, thus revealing the shift of the market’s psychology to positive.

Supply/Demand: Demand is greater than supply.

Sentiment: Positive.

Direction: Bullish.

Trigger: Consider buying if next candle exceeds high of the hammer.

Color of the body: black or white

Range of the body: small

Range of the upper shadow: small or non-existence

Range of the lower shadow:  2-3 times the size of the body

Location: End of downtrend or decline

 

6.3 BELT HOLD

It forms at the end of a decline or near a support area. The candle has a long white body and very small or non-existent lower shadow. The session opens near the low and closes near the high of the candlestick.  A long white body at the end of a decline reveals the determination of the bulls to push prices higher.

 Meaning:

After a prolonged decline, prices reach attractive levels triggering long positions as a result of buyers entering the market. This causes demand that surpasses supply. 

Supply/Demand: Demand is greater than supply.

 Sentiment: Positive.

 Direction: Bullish.

Trigger: Consider buying if next candle exceeds the high of the Belt Hold.

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small or non-existence

Location: End of downtrend or decline

 

6.4 ENGULFING PATTERN

A long white candlestick is formed at the end of a downtrend, preceded by a small black candlestick.  The body of the small black candlestick is completely engulfed by the body of the long white candlestick. The bearish pressure of the prevailing downward move, is overcome by the buyers entering the market aggressively at the end of the decline. This forms a long white candlestick with bullish implications.

Meaning:

During the course of a downward move and while prices fall lower, the presence of a smaller black body signifies that shorts have second thoughts on maintaining the bearish direction.  While the bears show signs of weakness, the bulls enter the market aggressively as they are lured by the attractiveness of prices.  As demand is higher than supply, and sentiment shifts to positive, prices climb to higher levels.

Supply/Demand; Demand is greater than supply.

Sentiment: Positive.

Direction: Bullish.

Trigger: Consider buying if next candle exceeds the high of the long white candle.

1st candle.

Color of the body: black

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: end of downtrend or decline

2nd candle.

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline. Follows a small black body. The body of the black candle is completely engulfed by the body of the white candle.

 

6.5 HARAMI

A small candlestick body of either colour follows a candlestick of a long black body.  The colour of the small candlestick is not important. The bearish decline is running out of steam as shown by the presence of the small candle which signals uncertainty, as it is contained by the previous long body.  The weakness of the market to push prices lower and the presence of the pattern at the end of a decline, signals possible bullish implications.

Meaning:

After a prolonged decline traders continue to trade in the direction of the prevailing trend until the market enters a phase of uncertainty, as traders are not willing to move the market lower nor higher at the moment.  The fact that, price action has been contained within the previous session’s open and close, it manifests weakness to move lower and a possible bullish reversal.

Supply/Demand: Equilibrium.

Sentiment: Neutral.

Direction: Possible bullish reversal.

Trigger: Consider buying if next candle exceeds the high of the long candle.

1st candle.

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline. Precedes a small candlestick of small body.

2nd candle.

Color of the body: white or black

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline. Follows a long body.

Body is within the range of the previous white candle’s body.

 

6.6 PIERCING LINE

During the course of a decline, a long white candlestick exceeds the midpoint of the previous long black candle. The white candle opens below the previous close or low.

Meaning:

Traders open short positions in the direction of the descent, as it remains intact. The opening of the next session, confirms the bears’ intentions, as the new candlestick gaps lower (either the close or the low price). Bears go with the direction of the downward move but the bulls find prices attractive - entering the market aggressively with long positions.

The session closes with gains for the bulls who managed to close the long white candle, well into the previous candle’s body.

Supply/Demand: Demand is greater than supply.

Sentiment: Positive.

Direction: Bullish reversal.

Trigger: Consider buying if the next candlestick exceeds the high of the long black candlestick.

1st candle.

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline. Precedes a long candlestick of white body.

2nd candle.

Color of the body: white

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline. Follows a long black body. It extends above the midpoint of the previous body.

 

6.7 TWEEZERS

The market continues to trade in the direction of the established decline, registering lower lows.  The next session is bullish, pushing prices higher.  The matching lows indicate that a possible bottom may be in place and a reversal may be imminent.

Meaning:

During the course of the downtrend, traders enter the market with short positions trading in the direction of the decline.  While the sentiment is clearly negative, the next session opens higher (than the previous close) as traders find prices attractive.  While the battle between bulls and bears goes on, traders enter with short positions but not willing to trade at a price lower than the previous session (thus matching lows), and long positions- to register a bullish candle and shift the sentiment to positive.

Supply/Demand: Demand is greater than supply.

Sentiment: Positive.

Direction: Bullish reversal.

Trigger: Consider buying if the next candlestick exceeds the high of the white candle.

1st candle.

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: Precedes a candle (ideally smaller white) with matching low.

2nd candle.

Color of the body: Any color (ideally white)

Range of the body: Any color (ideally small)

Range of the upper shadow: small

Range of the lower shadow: any size

Location: End of downtrend or decline. Follows a (ideally long black) candle with matching low.

 

6.8 HOMING PIGEON

The decline continues to record lower prices as reflected by the long black candle.  Next session is characterized by a smaller black body that is completely engulfed by the previous long black body, signalling weakness, setting the stage for further descent.

Meaning:

Sellers take advantage of the falling market, entering or adding onto their short positions.  Buyers find prices attractive entering the market with long positions. They do this in order to take advantage of the opportunity; pushing away from the low levels of the previous session, as the market action is contained in the range of the previous open and close. As sellers demonstrate reluctance to push prices lower, a possible bullish reversal could be in the making.

Supply/Demand: Equilibrium.

Sentiment: Neutral.

Direction: Possible bullish reversal.

Trigger: Consider buying if the next candlestick exceeds the high of the pattern.

1st candle.

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline

2nd candle.

Color of the body: black

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: Follows along black candle. The small candle is engulfed within the previous candle’s body.

 

6.9 THREE WHITE SOLDIERS

At the end of the downtrend or decline, the presence of thre

the presence of three consecutive long white candlesticks signify  the end of the downward move and the beginning of a new move in the opposite direction.  Each Marubozu opens below the previous close and concludes above it.  The upper shadows are very small if present - thus demonstrating the strength of the ascent.

Meaning:

After a prolonged downtrend or decline, traders enter the market aggressively with long positions, resulting in three consecutive long candlesticks that close higher than each other.

Demand is clearly greater than supply and sentiment is positive, these factors drive the market to rally higher.  The forceful control of the bulls, leaves the bears unable to react but to cover their short positions.

Supply/Demand: Demand is greater than supply.

Sentiment: Positive.

Direction: Bullish reversal.

Trigger: Consider buying if the next candlestick exceeds the high of the third long white candle.

1st candle.

Color of the body: white

Range of the body: long

Range of the upper shadow: small or non-existence

Range of the lower shadow: small

Location: End of downtrend or decline. Open is below prior close. Close is above prior close.

2nd candle.

Color of the body: white

Range of the body: long

Range of the upper shadow: small or non-existence

Range of the lower shadow: small

Location: Follows a long white candlestick. Open is below prior close. Close is above prior close.

3rd candle.

Color of the body: white

Range of the body: long

Range of the upper shadow: small or non-existence

Range of the lower shadow: small

Location: Follows a long white candlestick. Open is below prior close. Close is above prior close.

 

6.10 MORNING STAR

A long black candlestick forms in the direction of the prevailing trend, signifying that the decline is still in force. Next session gaps below, forming a small candle that acts as an obstacle to further decline.  A long white candle drives the market higher, well into the long black candle’s body and more specifically, above its mid-point - Indicating a bullish reversal.

Meaning:

Traders enter the market with short positions, pushing prices even lower in the direction of the established downward move.  A sudden phase of indecision or pause in the market appears and it is manifested by the small bodied candlestick, implying that the bears are losing their strength. Eventually, buyers’ pressure overcomes sellers’ pressure and the market bounces up and closes in the upper area of the long white candlestick.

Supply/Demand: Demand  is  greater  than  supply.

Sentiment: Positive.

Direction: Bullish.

Trigger: Consider buying if next candlestick exceeds the high price of the long white candle.

1st candle.

Color of the body: black

Range of the body: long

Range of the upper shadow: small

Range of the lower shadow: small

Location: End of downtrend or decline.

2nd candle.

Color of the body: white or black

Range of the body: small

Range of the upper shadow: small

Range of the lower shadow: small

Location: Follows a long black body. It gaps below the previous candle’s close.

3rd candle.

Color of the body: white

Range of the body: long

Range of the upper shadow: small or non-existence

Range of the lower shadow: small

Location: May gap above the prior candle’s body.  It closes above the mid-point of the long black candle.

 

07 BULLISH STRATEGIES

“TO RELY ON RUSTICS AND NOT PREPARE IS THE GREATEST OF CRIMES; TO BE PREPARED BEFOREHAND FOR ANY CONTINGENCY IS THE GREATEST OF VIRTUES.”

- Sun Tzu

 

7.1   Contrarian entry with Hammer, RSI and SMA (50)

7.2   Contrarian Entry with Piercing Line, RSI and SMA (50)

         as Take-Profit target

7.3   Harami with RSI filtering and SMA (20) as Take Profit Target

7.4   Tweezers with RSI and SMA (20)

7.5   Homing Pigeon with CCI and SMA (20)

7.6   Resistance with Long White Body and LWMA (50)

7.7   Three White Soldiers with RSI and SMA (20)

7.8   Morning Star filtered by Stochastics and EMA (50)

7.9   Engulfing with Stochastics and LWMA (20)

7.10 Belt Hold with Stochastics and EMA (20)

 

 

7.1 Contrarian entry with Hammer, RSI and SMA (50)

During a downtrend (or downward correction) the appearance of a Hammer filtered by RSI at the oversold area.

One could consider buying when the next candle exceeds the high price of the Hammer. Place a protective stop loss at the bottom (low) of the Hammer.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close the position when the price reaches the SMA(50).

2. Close 50% of the position when price travels 100% the length of the Hammer’s range, then close the remaining 50% when price reaches the SMA(50).

3. Other combinations may be applied.

 

7.2 Contrarian Entry with Piercing Line, RSI and SMA (50) as Take-Profit target.

During the course of a downtrend (or downward correction) the appearance of a Piercing Line pattern filtered by RSI at the oversold area.

One could consider buying when the next candle exceeds the high price of the long black candle.

Place a protective stop-loss at the bottom of the Piercing Line.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close the position when the price reaches the SMA (50).

2. Close 50% of the position when price travels 100% the length of the Piercing Line pattern then close the remaining 50% when price reaches the SMA (50).

3. Other combinations may be applied.

 

7.3 Harami with RSI filtering and SMA (20) as Take Profit Target.

During the course of a decline the appearance of a Harami pattern filtered by RSI at the oversold area.

One could consider buying when the next candle exceeds the high price of the long black candle.

Place a protective stop loss at the bottom of the Harami pattern.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close the position when the price reaches the SMA (20).

2. Close 50% of the position when price travels 100% the length of the Harami pattern then close the remaining 50% when price reaches the SMA (20).

3. Other combinations may be applied.

 

7.4 Tweezers with RSI and SMA (20).

During the course of a decline, the appearance of the Tweezers pattern filtered by RSI at the oversold area.

One could consider buying when the next candle exceeds the high price of the pattern. Place a protective stop loss at the bottom of the pattern.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 50% of the position when price travels 100% the length of the pattern

2. Close the remaining 50% when price reaches the 200% of the pattern or at the presence of a reversal candlestick pattern above the SMA (20).

3. Other combinations may be applied.

 

7.5 Homing Pigeon with CCI and SMA(20).

During the course of a decline the appearance of the Homing Pigeon pattern filtered by CCI at the oversold area.

One could consider buying when the next candle exceeds the high price of the pattern. Place a protective stop loss at the bottom of the pattern.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 50% of the position when price travels 100% the length of the pattern.

a. Close the remaining 25% when price reaches the 200% of the length of the      pattern above SMA(20).

b. Move the protective stop-loss at the top of the pattern.

c. Close the remaining 25% of the position at the presence of a reversal  candlestick or when price falls below the SMA (20).

2. Other combinations may be applied

 

7.6 Resistance with Long White Body and LWMA (50).

During  the course of a decline, the appearance of a Long White Body breaking through a resistance above the LWMA (50).

One could consider buying when the next candle exceeds the resistance or the high of the Long White Body.

Place a protective stop loss at the bottom of the pattern.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 70% of the position when price travels 100% the length of the pattern.

a. Close the remaining 20% when price reaches the 200% of the length of the pattern above LWMA (50).

b. Move the protective stop-loss just below the resistance.

c. Close the remaining 10% when price reaches 250% of the length of the pattern or prices close below the LWMA (50) or at the presence of a reversal candlestick, whichever  happens  first.

2. Other combinations may be applied

 

7.7 Three White Soldiers with RSI and SMA (20).

During the course of a decline, the appearance of Three White Soldiers filtered by RSI at the oversold area.

One could consider buying when the next candle exceeds the high price of the pattern. Place a protective stop loss at the bottom of the pattern.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 50% of the position when price travels 100% the last Long White Candle.

a. Close the remaining 25% when price reaches the 200% of the length of the last Long White Candle.

b. Move the protective stop-loss at the top of the pattern.

c. Close the remaining 25% of the position at the presence of a reversal candlestick or when price closes below the SMA (20) or when price travels 300% of the length of the pattern, whichever happens first.

2. Other combinations may be applied

 

7.8 Morning Star filtered by Stochastics and EMA (50).

During the course of a decline, the appearance of the Morning Star filtered by Stochastics at the oversold area.

One could consider buying when the next candle exceeds the high price of the third candle (white).

Place a protective stop loss at the bottom of the pattern.

You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 50% of the position when price travels 100% of the pips at risk.

a. Close the remaining 25% when price reaches the 200% of the pips at risk.

b. Move the protective stop-loss at the top of the pattern.

c. Close the remaining 25% of the position at the presence of a reversal candlestick or when price closes below the EMA (50) or when price travels 300% of the length of the pattern, whichever happens first.

2. Other combinations may be applied

 

7.9 Engulfing with Stochastics and LWMA (20).

During the course of a decline, the appearance of the Engulfing pattern filtered by Stochastics at the oversold area.

One could consider buying when the next candle exceeds the high price of the pattern. Place a protective stop loss at the bottom of the pattern. You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 60% of the position when price travels 100% the length of the pattern.

a. Close the remaining 20% when price reaches the 200% of the length of the pattern.

b. Move the protective stop-loss at the top of the pattern.

c. Close 10% of the remaining of the position when price reaches 300% of the length of the pattern.

d. Close the remaining 10% of the position at the presence of a reversal candlestick or when price closes below the LWMA (20) or when the price travels 400% of the length of the pattern, whichever happens first.

2. Other combinations may be applied.

 

7.10 Belt Hold with Stochastics and EMA (20).

During the course of a decline, the appearance of the Belt Hold pattern filtered by Stochastics at the oversold area.

One could consider buying when the next candle exceeds the high price of the pattern. Place a protective stop loss at the bottom of the pattern. You can consider the following actions, bearing in mind that a Take-Profit strategy is heavily dependent on the trading profile of each individual.

1. Close 50% of the position when price closes above the EMA(20) provided that the distance travelled is at least equal to the length of the pattern

a. Move the protective stop-loss at the middle of the pattern.

b. Close the remaining 20% when price reaches the 200% of the length of the pattern.

c. Move the protective stop-loss at the top of the pattern.

d. Close the remaining 20% of the position when price reaches 300% of the length of the pattern.

e. Close the remaining 10% of the position at the presence of a reversal candlestick or when price closes below the EMA (20).

2. Other combinations may be applied

 

Conclusion

Japanese Candlesticks are valuable technical analysis charts in a trader’s toolkit.  Now that you have an understanding of how they can be applied to your trading decisions, take the time to see how they can be used with other tools to help hone your trading strategies. To recap, they help you to determine the state of the market at a glance, identify market patterns quickly, and help you see specific bullish and bearish reversal patterns that cannot be seen on other charts.

Technical Analysis is the only way one can determine market sentiment, it helps to shine a light on movements when the fundamentals of the markets have not changed. Candlesticks tell a story that other types of charts do not. Mastering Technical Analysis is a skill that improves over time, as long as you keep learning, refining and practicing.

 

 

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IF YOU WISH TO BE A SUCCESSFUL TRADER I THINK YOU NEED TO TAKE THIS ACTS AND HAVE THEM AS A HABIT 

50 SUCCESSFUL TRADERS HABIT

Reach your trading potential

SUCCESSFUL

TRADERS’ HABITS

Written by:

Kingsley

 (EWEB Head of Education)

 

Kingsley

(BSc, MSc, MSTA, CFTe, MFTA)

EWEB’s Head of Education is one of the world most respected FX educators and Certified Technical Analysts. Kingsley is known for being an authority in algorithmic trading and for developing hundreds of automated systems, indicators and trading tools used today. His passion for educating traders and Forex industry professionals has made him a Guru of the industry with his tutorials being welcomed across the globe by thousands of attendees on a regular basis. Kingsley's seminars are instilled with a lively atmosphere and renowned for being enthusiastic and exceptionally informative with outstanding attendance on every occasion. kingsley's seminars and workshops are tailored to all experience levels, where both beginner and advanced traders gain thorough understanding of the financial markets and a deep knowledge of market analysis. His seminars particularly emphasis the importance of trend and risk management in order to maximize earning potential. With his extensive knowledge, Kingsley has been revolutionising forex education for years and was awarded with the international professional certificate, MSTA by the Society of Technical Analysts (UK), CFTE and MFTA by the International Federation of Technical Analysts (USA). In addition, his latest research thesis is entitled “Anatomy of a living trend: Swing charts, High Points and Low Points, Peaks and Troughs and how their underlying structure may define their forecasting strength.”

INTRODUCTION

The purpose of this book is to provide you with useful tips and tools to ensure that you become an educated investor. EWEB has a team of highly-experienced trainers who develop materials for all levels of trader. Whether you are just starting out, or consider yourself an advanced trader, you will find material that will enhance your skills. This book represents a small fraction of our educational suite, which includes seminars, webinars, videos, articles and eBooks. These resources are free to use, to help you sharpen your skills on the way to becoming a successful investor.

01

Invest in yourself before you invest in the markets

In any business endeavor, a good understanding of the business, an identification of opportunities, thorough risk assessment and a sound strategy are imperative to success.

Knowledge of the foreign exchange market is a must before you start investing. Successful traders know that very well, that’s why they continually invest in their knowledge. And that’s why we at EWEB offer professional training sessions, seminars, webinars and tools so that you the trader can learn as much as possible. EWEB offers continuous training programs with our team of highly experienced trainers, covering all levels of trading knowledge, including beginner, intermediate and advanced. The best thing about investing in your education with EWEB is that we provide these learning tools for free so that you can invest your time and money wisely.

02

Learn the rules of the game

Knowing the rules of the game before you play it is essential. Would you get behind the wheel of a car and start to drive before you knew the rules?

Of course not. You need to learn how to turn, when to stop and how to safely accelerate before you put yourself and others at risk on the road. Forex trading is a little more complex than driving a car, but the basic principle remains the same. You need to learn and understand the rules before you start to trade. Understanding the details of your trading account, such as your account currency, spread, leverage, margin requirements, execution type, margin call and contract specifications  just to name a few are vital if you are going to succeed. With the right tools, safety measures and professional support, FXTM sends you on the open road fully equipped to make the right decisions when you trade.

03

Practice, Practice, Practice

Practice makes perfect!

This also applies to trading the markets. After mastering the theory, rules and trading techniques, a time comes to put all that knowledge into practice under real conditions, but with virtual money! At FXTM we believe that it is important to feel confident when you are trading with your hard- earned money, so we provide free demo accounts until you feel truly ready to make educated decisions. With a demo account, you can test out the markets, trade under different market conditions and practice your trading strategies with virtual money. Even the best traders in the world use a demo account from time to time to test out new methods and strategies. At FXTM we offer free demo accounts that can be used at any time, no questions asked.

04

Start small with a real account

Whilst practicing on a demo account is a good beginning, successful traders know that trading psychology, discipline and emotions are very different when real money is involved.

The fear of losing, the greed of a big win and the panic you may feel if a trade goes against you are all common emotions you will need to learn to control in order to become successful. FXTM encourages new traders to start small and take trading at their own pace. We want you to experience live trading in a comfortable environment where you are not risking more than you can afford to lose. By opening a live account with FXTM, you will experience real trading emotions in a safe and supportive environment. Open an account with FXTM and start trading to see for yourself.

05

Do not expect to become a millionaire with a $100 deposit

One of the major reasons foreign exchange has expanded all over the world, and enjoys high

popularity amongst traders, is undoubtedly leverage.

It is true that leverage attracts the attention of many traders and especially those who make small deposits. Many beginners rush into trading with a low deposit, expecting to make huge profits. More often than not, their false expectations lead to poor decisions and disappointment. Understanding leverage, strategy and money management are key to extending the power of your deposit, so reset your expectations and learn how to invest your time wisely. Successful traders know very well that their potential profits correspond to their risk.

06

Have realistic expectations

Successful traders have realistic expectations, which is directly linked to understanding the risk to reward ratio.

How much are you willing to risk?

How much are you able to deposit?

How many hours can you dedicate to your trading? Your answers to these questions will ultimately define your potential profits! Successful traders have detailed plans for their trading and their expectations are grounded in reality which makes them less likely to go off the rails. Learning the rules and having realistic expectations means knowing when to enter a trade and, ultimately, when to exit. Follow our seminars and master your risk management to reach your trading potential.

07

Learn to identify the trend 

The trend is your friend. We have all heard that phrase so many times, but many traders don’t follow the wisdom behind the words.

Well, successful traders do! Their success depends on identifying the trend early on, following it and understanding how to maximize its benefits. This can be daunting for new traders because they are not trained on identifying trends in the early stages of development. Learning how to spot the small signs of a trending financial instrument is a key technique for success which every great trader uses. A trending financial instrument is more likely to continue in the direction of the prevailing trend rather than reversing, so it is a great source of guidance for traders. The center of our teachings at FXTM is the trend, and we provide hands-on training sessions to help you spot it.

08

Learn to identify trend reversals

A trend reversal marks the end of an existing trend and the beginning of a new one, and it’s the fastest way to “jump” on a new trade.

This can happen in any timeframe and it can make the difference between a big win, a break even or a loss. Successful traders understand that very well and use it to their advantage every single day. Being able to effectively read your trading charts and understand the crowd’s trails is essential  at FXTM we can teach you exactly how to identify trend reversals.

09

Develop a trading system based on trend following & trend reversal

There are thousands of trading strategies out there, which may be confusing for a beginner.

Don’t worry, though, as most strategies are trend following. This is not a coincidence because trending markets are more likely to continue than to reverse. If you need to learn one strategy it’s trend following & trend reversal. FXTM will teach you how to identify the prevailing trend and how to enter the market when a new trend starts afresh. It would be a good idea to develop your own trading system based on trends. Learn to identify the prevailing trend. Spot the reversal. Know your entry to the market. Under- stand the exit. Follow it.

10

Test your system

As a beginner, you may be wondering, ‘why do I need a trading system?’

What could possibly be the reason for wanting to follow a trading strategy? Having a system is easy. The hardest part is following it. A fully tested system allows you to trust it and act with machinelike accuracy as to when it may be best to enter the market, take your profit or even cut your losses short. Once you’ve found a comfortable mixture of indictors and risk management rules, it comes time to test… test…test! Only by testing your strategy will you know if it is profitable and worth repeating. Take your time and build up trust in your system so that you’re ready to follow it and take advantage of the opportunities the market certainly has in store for you.

11

Revise your system to achieve low Drawdown

Many traders in the early stages of their trading career look for a trading system that boasts a high percentage of winning profits, largely ignoring one of the most important parameters of evaluating a trading system: draw down! A drawdown is the peak to trough decline during a specifically recorded period of an investment, and it is closely linked with risk management which is imperative for a successful trading system. Successful traders follow strict risk management rules and make sure that their trading account enjoys low drawdown. You can learn drawdown basics with FXTM’s free training webinars, seminars and helpful videos.

12

Revise your system to boost your potential winning trades

A lot of papers and articles have been written about this vital topic in trading the markets. Some may argue that less winning trades over losing trades is not a big deal as long as the winnings outweigh the losses. The bottom line, they say, is to have more profits than losses. No problem! What about the trader’s psychology, though? How does a trader feel when he or she loses? Not very pleasant, for sure! When emotions take over, a trader’s mind goes blurry. A blurry mind is a recipe for unpredictable outcomes such as a lack of discipline. Successful traders know that very well and make sure that their strategy has more winning. trades than losing trades. After all, trader’s psychology is invaluable in trading the markets successfully.  At FXTM our team of experts has plenty of tips to help you boost your potential wins and minimize your losses.

13

Lock small profits                                   

A lot of economists and fundamentalists will argue that financial markets are unpredictable.

This is only partially true! When markets enter a consolidation phase they are usually trendless, lacking a direction. But when a breakout of the accumulation or the distribution phase occurs, markets do trend and that is manifested on the price charts. Obviously, a trending market is a dream come true for all trend followers out there. This is the phase where money may be made. But what about volatility? What about unexpected events? A single price movement in the opposite direction is enough to turn a winning trade into a losing trade. Make sure you get what you deserve and lock potential profits as the trend is being unfolded on the price chart. FXTM provides you with trading features that can protect your potential profits by locking small profits! Find out more by speaking with our experienced team.

14

Incorporate risk management rules

Imagine that you are a captain of a boat entering stormy seas. Wouldn’t you feel better if you had a host of safety tools onboard such as a compass, life jacket, emergency radio and inflatable raft? The same is true when trading the markets. We may not want to think about the worst case scenario, but it is entirely necessary to do so. One of the most important elements of a successful trading strategy is undoubtedly the existence of risk management rules. These rules define initial protective stop loss, trailing stops, take profit levels, reward to risk ratio and last (but not least), position sizing. In our educational events we address all these topics and we make sure that you understand their importance. Successful traders do!

15

Go easy on leverage. It’s risky

One of the most lucrative aspects of trading is leverage.

Leverage is the reason that traders with a small deposit are able to make large amount of profits. Great right? Well, yes, but at the same time, leverage is to blame for big losses because whilst profits can happen quickly, losses can too! Leverage is a financial tool to enhance a trader’s potential to be able to earn more profits with less money. Unfortunately, in the same way that leverage multiplies profits it also multiplies losses and can quickly wipe out a poorly managed trading account. Use it sensibly.

16

Calculate your position size every

time you open a position

Many traders believe that risk management only comes into play when a trade is going against them, so novice traders often enter the market impulsively without any risk management rules in place. Large drawdowns, stress, lack of discipline and of course the inevitable margin call and stop out can be catastrophic to a trader’s psychology and trading account! It is imperative that traders understand their risks before entering the market or opening a position. How much money might you lose if the market doesn’t follow the direction you expected? Is your protective stop loss in place? What is your margin? Taking your time to calculate your position before every trade may save you a lot of heartache in the long run.

17

Always place a protective stop loss

Here’s a scenario. If you were walking a tightrope between two buildings, would you prefer to have the glory of doing it without any safety tools or would you be happier knowing that there was a safety net halfway down to catch you if you fall? The safety net won’t interfere with your task it is simply there to protect you if the worst happens. This is the essence of a protective stop loss yet many traders don’t use them. This is usually because in trading there is plenty of ego to go around! Who wants to admit that they were wrong or that their trade went wrong? That’s really painful and that’s why human beings rarely admit that they are wrong. Let go of your ego, be humble and understand that even the best traders use stop losses. They are a part of trading. Learn to accept them and place a stop loss to protect your capital!

18

Trail the stop loss to protect profits

In a quest to find the perfect entry, traders usually ignore the fact that entering a position is just one element of trading the financial markets.

Many other parameters also exist that are equally as important to trade successfully. The trailing stop is one of them. A trailing stop is designed to protect gains by enabling a trade to remain open and profits to run as long as the price is moving in the right direction, but closing the trade once the price changes direction. In periods of success, where traders let their profits run, it is wise to protect profits with a trailing stop loss. As profits grow, successful traders move the trailing stop loss closer to the current price just in case the unexpected happens. Tools such as this make it possible for you to trade with more discipline.

19

Be wary of Trading news events

Trading news events, especially the high impact ones like NFP (non-farm payroll) is an adrenaline rush for most traders.

The anticipation, the market buzz, the announcement and the high volatility that surrounds the event is so appealing that most traders overlook the dangers and risks. Re-quotes, slippage, lack of direction and the resulting frustration are just a few consequences. The abrupt bidirectional price movement also doesn’t leave a lot of room to maneuver, especially on lower timeframes where most novice traders are trading. At FXTM we offer controlled training during real life market events so that you can understand the way the market reacts. You may find the lure of trading news events too much to resist but you also need to understand the risks involved and be wary.

20

Define the trading hours

One of the most appealing characteristics of the foreign exchange market is undoubtedly the trading hours. Twenty-four hours per day, five days a week. Yes, twenty four hours each and every working day. Obviously, this schedule can accommodate any trader any- where in the world but be cautious! Before you start trading, choose the hours that are most suitable to your lifestyle, trading profile and character. Study the characteristics of these hours. Learn about session overlaps. How do currencies and other financial instruments behave during those trading hours? Is price action volatile or dormant? Do prices usually move in a narrow range or do they usually trend? Before you decide on your trading hours do some research and be realistic about your commitments.

21

Master the art of discipline

Having a professional trading system and risk management rules are not enough.

Discipline is a prerequisite for all successful traders but the good news is that it can be mastered all that’s required is some willpower from your part. Just as an athlete will rise at 5am each day to train, so you must acquire a strictly disciplined regime for your trading. This involves studying the markets (especially the ones you will be trading), paying close attention to relevant news announcements and mastering your self-control. Discipline cannot be taught, however there are plenty of ways to master it. You just need to find the one that works for you. Successful traders take the time to perfect their discipline and so can you.

22

If you cannot stick to your system, then have an EA developed for you

Expert Advisor trading systems (EAs) are developed through the use of empirical observations combined with statistical findings and back testing on historical data, as well as forward testing on live prices.Sounds complicated right? Well for most traders it probably is but that’s why we use them… to take some of the calculations and stress out of everyday trading. Sometimes, the development phase requires visual inspection of the price charts, expertise, hard work, tweaking of parameters and long hours during the day and night. Why all that trouble? Well the answer is quite simple. To have a road map for trading the markets. Precise entry points, precise profit level

THE ELLIOT WAVE THEORY

ELLIOT WAVE THEORY

- The –

Elliott

Wave

Theory

Written by

Kingsley

(Head of EWEB)

Contents

1. Introduction

2. Dow Theory

3. Directions of Trend

4. Five Waves

5. Markets do not Move in a Straight Line

6. A Complete Elliott Cycle

7. Repetitive Structure

8. Wave Degrees

9. End of the Trend and Beginning of Another

10. Phases

11. Rules and Guidelines

12. Wave 2 Never Moves beyond the Beginning of Wave 1

13. Wave 3 is Never the Shortest

14. Wave 3 Always Travels beyond the End of Wave 1

15. Wave 4 Never Enters the Territory of Wave 1

16. The Principle of Alternation

17. Extensions (and Counting Waves)

18. Corrective Waves

19. Zigzag Corrective Wave

20. Flats – Corrective Waves

21. Irregular Flats – Corrective Waves

22. Inverted Irregular Flats – Corrective Waves

23. Triangles – Corrective Waves

24. Symmetrical Triangle – Corrective Wave

25. Descending Triangle – Corrective Wave

26. Ascending Triangle – Corrective Wave

27. Running Triangle – Corrective Wave

28. Expanding Triangle – Corrective Wave

29. Triangles – Minimum Price Target (Measuring Technique I)

30. Triangles – Minimum Price Target (Measuring Technique II)

31. Double Three Combinations – Corrective Waves

32. Triple Threes Combinations – Corrective Waves

33. Wave Fibonacci Relationships – Extended Wave

34. Minimum Length of Wave 3

35. Wave 5 Maximum Price Target

36. Wave 5 Minimum Price Target

37. Extended Wave 5 Price Target

38. Zigzag Wave Relationships

39. Correction or Reversal

40. Crowd Psychology

41. Channeling

42. Time Factor

43. How to Trade Wave 3

44. How to Enter in Wave 3 Even Faster

45. How to Trade Wave 5

46. Trading the ABC Reversal

47. Final Thoughts

 

Introduction

As Head of Education at EWEB, I have trained thousands of traders, both beginners and advanced, on different concepts and theories on trading the financial markets. People are very enthusiastic to learn new strategies, tools and concepts, but what I came to realize is that every trader’s dream is to master the Elliott Wave Principle and Fibonacci ratios. They are fascinated by the recurring structure and cyclic model that the wave principle suggests. In this book, I will present both the Elliott Wave Theory and Fibonacci ratios from a trader’s point of view.

About the Author

EWEB’s Head of Education, Kingsley, is a respected FX educator and Certified Technical Analyst. He is a recognised authority in the forex industry, and renowned for his expertise in algorithmic trading. After years of consulting with EWEB on a number of key projects, Kingsley officially joined the company in June 2016 and is the principal driver and architect of EWEB’s extensive educational programme. His department’s international seminars and workshops provide clients across the world with on-location support, while his webinars, e-books, educational articles and videos form the cornerstone of EWEB’s multilingual, open access training resources. The training is tailored to traders’ needs by region and experience level.

kingsley has played a key role in the development of forex education within the industry, training tens of thousands of traders and forex professionals around the world. Traders of all levels value his seminars and workshops for both content and his passionate and lively presentations. As Head of Education, Kingsley also plays a pivotal role in EWEB’s research and development team. In this capacity, he led the development of the EWEB Trading Signals and EWEB Pivot Points Strategy tools, which are designed to help traders spot potential trading opportunities across various trading instruments.    

kingsley has been awarded a number of international professional certificates including: MSTA by the Society of Technical Analysts (UK) and CFTe and MFTA by the International Federation of Technical Analysts (USA) – the highest qualifications in the technical analysis community. He also holds a BSc and MSc in Computer Science from University of Louisiana at Lafayette and Bowie State University, respectively.

2. Dow Theory

There is no way to start talking about technical analysis and the important concept of the trend without mentioning Charles Dow. I consider Charles Dow to be the “father” of technical analysis. What intrigues me about the theory is the tenet on trends: a trend will continue to move in the same direction until a definite signal suggests that it has come to an end. This reminds me of Newton’s first law of motion —which states that a body in motion will continue to move in the same direction at the same speed until an external force acts upon it. Naturally, one will ask what is a trend? Well, according to technical analysis, a trend is defined as the direction of successive tops and bottoms – either up or down.

3. Directions of Trend

Successively higher tops and higher bottoms define an uptrend, while successively lower tops and lower bottoms define a downtrend. Of course, there are times that prices do not follow an uptrend nor a downtrend — but instead, they are “trapped” in a range known as a sideways market. A range is defined as an area on the chart where prices are confined by the upper and lower boundaries. In hindsight, it looks very tempting to trade; in reality, it is more complex than it looks, as it takes different shapes and patterns such as a rectangle, triangle or combination of patterns.

4. Five Waves

Ralph Nelson Elliott, who also studied the Dow Theory, suggested that markets unfold in five waves. More specifically, during his empirical observations and after analyzing 75 years of the market’s historical prices and stock market behavior, he concluded that five waves are required to have a structured progression in the market. Three waves in the direction of the trend and two waves in the opposite direction. This is the 5-wave pattern:

5. Markets do not Move in a Straight Line

This is what every trader should learn and understand in the early steps of studying the financial markets. Prices do not move in a straight line, but rather they follow a zigzag path. A good way to comprehend it is to observe the 5-wave structure. Waves 1, 3 and 5 move in the direction of the trend, whereas waves 2 and 4 form a pause in the development of the trend.

6. A Complete Elliott Cycle

Additionally, Elliott noted that a corrective pattern denoted by the letters A, B, C moves in the opposite direction of waves 1, 2, 3, 4 and 5. So, a complete Elliott cycle consists of 8 waves — 5 waves in the direction of the trend, also known as motive waves, and 3 waves countertrend, also known as corrective waves. Interestingly enough, Elliott mentioned that the 8-wave structure is repetitive.

7. Repetitive Structure

Each wave subdivides into smaller waves of one lesser degree. For example, waves 1, 3 and 5 consist of 5 smaller waves, whereas each corrective wave such as 2 and 4 consists of a 3-wave structure A-B-C. So, wave  1  subdivides into smaller waves (1), (2), (3), (4) and (5). Similarly, wave   2   subdivides into waves (a), (b) and (c). Additionally, waves (a) and (c) subdivide into 5 smaller waves, as do waves (1), (3) and (5) - which are also known as impulse waves. Conversely, waves (2), (4) and (b) subdivide into 3 corrective waves. In a nutshell, each wave is part of a wave of a higher degree and at the same time, it subdivides into waves of a lesser degree.of a lesser degree.

8. Wave Degrees

Elliott identified nine degrees, ranging from minutes to decades and even centuries. The naming conventions are as follows, but the most important thing to remember is that the basic 8-wave structure is present at every degree. Each wave subdivides into waves of one smaller degree and each wave is part of the wave of one higher degree.

Grand Super Cycle: ((I))  ((II))  ((III))  ((IV))  ((V))  ((a))  ((b))  ((c))              

Super cycle: (I)  (II)  (III)  (IV)  (V)  (a)  (b)  (c)

Cycle: I  II  III  IV  V  a  b  c

Primary: ((1))  ((2))  ((3))  ((4))  ((5))  ((A))  ((B))  ((C))

Intermediate:  (1)  (2)  (3)  (4)  (5)  (A)  (B)  (C)

Minor:  1  2  3  4  5  A  B  C 

Minute:  ((i))  ((ii))  ((iii))  ((iv))  ((v))  ((a))  ((b))  ((c))

Minuette:  (i)  (ii)  (iii)  (iv)  (v)  (a)  (b)  (c)

Subminuette:  I  ii  iii  iv  v  a  b  c

 

 

9. End of the Trend and Beginning                                                                                                                              of Another Waves that move in the same direction as the wave of a higher degree subdivide into 5 smaller waves. On the other hand, waves that move in the opposite direction subdivide into 3 waves. So, it makes sense that after identifying a 5-wave structure that there is more correction to come! That is true for both upward and downward movements. More specifically, after identifying wave 1, which consists of 5 waves of a lesser degree, one can expect more rally to come. This is also true for wave 3 as well. The only exception is the fifth of the fifth wave. This will signal the completion of wave 1 of a higher degree. Usually, Oscillators will be at the extremely overbought area. Similarly, waves A and C will also consist of 5 waves as they move in the direction of the wave of a higher degree, wave 2. Conversely, waves 2, 4 and B consist of 3 waves as they move in the opposite direction of the wave of a higher degree.

10. Phases

A complete Elliott Wave cycle consists of the motive and corrective phase. This includes the waves of the prevailing trend, these being 1, 2, 3, 4 and 5. On the other hand, the corrective phase includes waves a, b and c.

Waves 1, 3 and 5 are called impulse waves, whereas waves 2 and 4 are called corrective waves.

11. Rules and Guidelines

The Elliott Waves follow certain rules and guidelines as observed by Ralph Nelson Elliott. If any of the rules are violated, then the counting of waves is invalidated. So, the following rules must be present at all times:

•    Wave 2 never retraces 100% of wave 1

•     Wave 3 is never the shortest wave among the impulse waves 1, 3 and 5

•    Wave 3 always travels beyond the end of wave 1

•    Wave 4 never enters the territory of wave 1

Also, the following guidelines may be observed as tendencies rather than rules:

•    Alternation. If wave 2 is sharp, then expect wave 4 to be sideways and vice versa

•    If one of the impulse waves 1, 3 and 5 are extended, then the other two will tend to be equal or a Fibonacci ratio.

12. Wave 2 Never Moves beyond the Beginning of   Wave 1

 Most traders who follow Elliott Waves count the waves in an attempt to identify profitable setups and forecast the price direction. In counting the waves, one has to observe certain rules or the counting is invalid. For example, wave 2 should never retrace or fall below the beginning of wave 1. Similarly, in a bearish market, wave 2 should never retrace or exceed above the beginning of wave 1.

13. Wave 3 is Never the Shortest

This is a very important rule which hints at the preferred wave to trade. As wave 3 is never the shortest among the impulse waves 1, 3 and 5, it makes sense that if we had to choose one wave to trade, then wave 3 would be on the top of the list.

14. Wave 3 Always Travels beyond  the End of Wave 1

It makes sense! After all, progress is achieved when prices exceed the previous highs. This is the point at which market participants will enter the market as sentiment and traders’ psychology rises and economic news improves. Crowd psychology and peer pressure draw traders to enter the market, as the temptation to conform to the majority is hard to resist.

15. Wave 4 Never Enters the Territory of Wave 1

 More specifically, the end of wave 4 never enters the territory of wave 1. This is true in many other popular technical analysis concepts  and theories. For example, once price penetrates a top that acts as resistance, it changes the role and it becomes support. This is very common in observing support and resistance. Of course, almost every rule has an exception or two and this is also true for wave 4. At times when the wave 4 correction is a triangle, it might overlap with wave 1 — but the rule states that it should end out of the territory of wave 1.

16. The Principle of Alternation: If corrective wave 2 is sharp, then expect wave 4 to be sideways. Similarly, if wave 2 is a sideways correction, then expect wave 4 to be sharp.

17.  Extensions (and Counting Waves)

One of the impulse waves 1, 3 and 5 will be extended. The other two will tend to be equal or a Fibonacci ratio. Empirically, wave 3 is usually the one to be extended. Extensions may increase potential profits if the trade taken is in the right direction, but at the same time may hinder counting waves.

18. Corrective Waves:

Corrective waves come in four broad categories:

• Zigzags

• Flats

• Triangles

• Combinations

The complexity and the wide range of combinations make corrective waves risky and almost unpredictable.

19. Zigzag Corrective Wave:

 The Zigzag, or sharp correction as it also is known, is perhaps the simplest form of corrective waves. It is an ABC corrective wave, where wave A moves in the opposite direction of the motive 5-wave structure. Wave A subdivides into 5 smaller waves. Similarly, Wave B moves in the opposite direction of A and it subdivides into 3 smaller waves. The terminal wave of the ABC structure, wave C, extends well beyond the beginning of wave B.

20. Flats – Corrective Waves:

 If the corrective wave is not sharp, then it is expected to be a sideways correction. Sideways corrections come in different shapes and  “flavours”. One of them is the flat (regular) correction, which consists of 3 waves, referred to as ABC. It is considered a "shallow" correction, as the price movement is not as sharp as that of the Zigzag. More specifically, wave B usually terminates close to the beginning of wave A, whereas wave C usually concludes close to the beginning of wave B. Flat corrective waves follow the 3-3-5 structure. It consists of 3-3-5.

21. Irregular Flats – Corrective   Waves:

 A variation of the Flat correction is the Irregular Flat, whereby waves B and C extend beyond the beginning of wave A and B respectively. It is also known as an Expanded Flat.

22. Inverted Irregular Flats – Corrective Waves:

 On the other hand, if wave C falls short and doesn’t extend beyond the beginning of wave B, then this variation is called Running Flat or Inverted Irregular.

23. Triangles – Corrective Waves:

 Another type of sideways correction is the triangle. There are four types of corrective triangles: Ascending, Descending, Symmetrical, and Broadening (or “Megaphone”). They follow a 3-3-3-3-3 structure and, of course, are considered a continuation pattern. At least four points are needed to draw a triangle: 2 points for each side. Remember that we need at least two points to draw a straight line. The opening between the two sides is called the base, and the point where the two sides meet is called the apex. Triangles boast a unique feature of calculating minimum price targets.

24. Symmetrical Triangle –Corrective Wave:

 Geometry teaches us that a symmetrical triangle is made up of two equal sides. A symmetrical triangle follows a structure of 3-3-3-3-3. Symmetrical triangles are also known in the bibliography as Contracting or Coil. When the price eventually breaks out of the triangle, it will most probably follow the direction of the established trend. How far will it travel? That can be estimated with the same measuring techniques that are applied to all triangles.

25. Descending Triangle – Corrective Wave:

 Another type of sideways correction is the triangle. There are four types of corrective triangles: Ascending, Descending, Symmetrical, and Broadening (or “Megaphone”). They follow a 3-3-3-3-3 structure and, of course, are considered a continuation pattern. At least four points are needed to draw a triangle: 2 points for each side. Remember that we need at least two points to draw a straight line. The opening between the two sides is called the base, and the point where the two sides meet is called the apex. Triangles boast a unique feature of calculating minimum price targets.

The only difference with a descending triangle is that one of the sides is flat and is on the bottom. It still follows a 3-3-3-3-3 structure and the measuring techniques are the same. During an uptrend, the price will usually break out of the inclined side, not the “flat” side, in the direction of the prevailing trend. On the other hand, the price will usually break out of the flat side during a decline. An estimation of the minimum price target after the breakout will follow the same principles of the triangle measuring techniques.

26. Ascending Triangle –Corrective Wave:

 An ascending triangle also has a flat side, but this time it is on the top. The price will break out of the flat side during a rally in the direction of the prevailing trend. Similarly, during a downtrend price will break out of the inclined side, not the flat. As expected, it shares the identical structure of 3-3-3-3-3 and the same measuring techniques.

27.  Running Triangle – Corrective Wave:

 Another type of sideways correction is the triangle. There are four types of corrective triangles: Ascending, Descending, Symmetrical, and Broadening (or “Megaphone”). They follow a 3-3-3-3-3 structure and, of course, are considered a continuation pattern. At least four points are needed to draw a triangle: 2 points for each side. Remember that we need at least two points to draw a straight line. The opening between the two sides is called the base, and the point where the two sides meet is called the apex. Triangles boast a unique feature of calculating minimum price targets. A running triangle is very similar to a symmetrical triangle, with the exception that Point B exceeds the beginning of wave A. It also follows the 3-3-3-3-3 structure and the same measuring techniques.