Content. A Note from Chris 3 Introduction 4 Overview 6

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2 Content A Note from Chris 3 Introduction 4 Overview 6 Solitary Candlesticks 7 Momentum 10 When Momentum Is Lost 17 Long Shadows 19 Rejection 20 Reverse Rejection 22 Summary 25 Relative Candlesticks 26 Relative Momentum 27 Understanding Candle Patterns 31 Anchor Candles 33 Reverse Candlestick Psychology 39 How Reversal Patterns Work 43 No Man s Land 45 Reading Price Action 46 Candlestick Trading Principles 59 Momentum Candle Completion 59 Multiple Time Frame Perspective 61 Parting Words 63 2

3 A Note from Chris Hi, this is Chris Lee from PipMavens.com and I d like to congratulate you on taking the next step in your trading education! Candlesticks are one of the most misunderstood aspects of trading, and this book is designed to teach you how to interpret them properly. Amateur traders think candlestick analysis is all about continuation and reversal patterns but in practice, there s much more to it than meets the eye. Every trading chart tells a story, and candlesticks are the sentences that tell that story. This book will teach you the fundamentals of price action, so you ll never have to memorise another candlestick pattern. Once you understand the language of candlesticks, you ll be able to tell what any market is up to just be looking at a bare candlestick chart! Take the time to read each section carefully, and keep coming back to review these concepts you ll often find a few ideas you didn t catch on the first read. By the time you re done with this book, you ll be light years ahead of your trading peers. Congratulations again for making the right choice. 3

4 Introduction Being a trader is very much like being a detective. Imagine you re a detective who s trying to solve a murder case what s the first thing you ll have to do? You ll have to conduct a general survey of the crime scene, question the witnesses and try to determine the motives of the suspects. This will give you a general idea of how, why, when and by whom the crime was committed. But that s not enough to solve the case, is it? General ideas are not enough you ll need to gather evidence to support your claims. And so you zoom-in on the details of the crimes scene. You dust for fingerprints, test for DNA, and go though the video recordings before, during and after the crime was committed. All evidence must point to the same suspect in order for him to be convicted of the crime. Without the evidence, you can t solve the case. But what has this got to do with trading? You see, profitable trading involves this exact same process. You ll first have to step back and take a look at the big picture: What s the market trend? Where are the major support and resistance levels? What s the outlook of the U.S. dollar over the next couple of weeks? 4

5 These are all questions that will give you a rough idea of where the market is headed. But just like in the detective analogy, this information alone should not be convincing enough for you to take any action you ll need to zoom-in on the candlestick activity to confirm your suspicions before placing a trade. Candlestick analysis is how you ll gather evidence to support your trading decisions. The focus of this book is to teach you to understand and appreciate the ongoing story of the market, and to identify the evidence you need to make effective trading decisions. Once you understand how to properly interpret candlesticks, you ll be able to enter and exit the market with pinpoint accuracy, and maximum profits. 5

6 Overview This book is organised into 4 main sections: 1. Solitary Candlesticks We ll begin by introducing candlesticks that have a significance on their own. These are single candlesticks that convey a particular message about what s happening right now in the market. 2. Relative Candlesticks Next, we ll look at how neighbouring candles can give you a clearer picture of the recent price action. We ll expand on the concepts covered in the previous section, and apply them across a series of candlesticks. This is where we ll uncover the story of the market simply by looking at a bare candlestick chart. Then, we ll take a look at Anchor candlesticks before moving on to discuss the psychological support/resistance areas inherent in all candlesticks. 3. Reading Price Action This is where we ll practice applying everything we ve learned on a live chart example. 4. Candlestick Trading Principles Finally, we ll go through a couple of time-tested principles to enhance the effectiveness of trading with candlesticks. 6

7 Solitary Candlesticks If you re new to candlesticks, here s a quick primer: What s a candlestick? A candlestick is a graphical summary of market price movements within a period of time. It can represent price movements that occurred over a period of 1 minute; 5 minutes; 15 minutes; 30 minutes; 1 hour; 4 hours; 1 day; 1 week; or 1 month. Here s what a candlestick looks like: The thick portion is known as the real body, and the thin portions are known as the shadows. So what does the real body and shadow tell us about how the market price moved? 7

8 First of all, remember that each candlestick represents how prices moved over a specific period of time. Let s assume that the candlestick below represents price movement over a 1 hour period. The open level indicates the market price at the start of the hour. The close level indicates the market price at the end of the hour. The high and low indicate the highest and lowest prices that were traded within that 1 hour, respectively. You may have wondered at this point why the candlestick is green. Most trading platforms will allow you to change the colour of the candlesticks on your charts, so it doesn t really matter. For the rest of this book however, I ll use green to represent a bullish candlestick, and red to represent a bearish candlestick. What s a bullish/ bearish candlestick? A bullish candlestick represents market prices that generally moved up over the period of the candlestick. If you look at the 1 hour candlestick (above), you ll see that the close price is higher than the open price. This means that in that 1 hour, the market price moved from the open price, up to the close price. 8

9 And now here s a bearish candlestick: It shows how prices moved down over the time period of the candlestick. Bearish candlesticks are usually represented by the colour red or black. The only difference between a bullish candle and a bearish candle is where the opening and closing prices are located. For a bull candle, the closing price is always higher than the opening price. For a bear candle, the closing price is always lower than the opening price. In this way, a candlestick chart basically displays a series of opening, closing, high and low prices over time: 9

10 Momentum This is one of the most important concepts candlestick analysis, so pay close attention Now, what is price momentum? Price momentum is an approximation of the strength of a price move. As a start, we can gauge the momentum of a candlestick by the length of the real body: The longer the real body, the stronger the momentum The shorter the real body, the weaker the momentum Now try to answer this question: Which of these candlesticks shows stronger momentum? Take a moment to think about this, and proceed only after you ve decided on your answer. 10

11 Did you guess the candlestick on the right? If you did, good job! So how do we know that the candlestick on the right had stronger momentum? Answer: Because prices closed further (i.e. higher) up, or, because the candle had a longer real body. Simple, huh. But that s not all there s more to this. You see, the length of the shadows matters as well. Here s what I mean: As you can see, the longer the shadows, the weaker the momentum. Now think about this: why do long shadows indicate weak momentum? 11

12 Ready for the answer?.. Because long shadows tell us that the market price did not move strongly in one direction. Long shadows are the result of significant fluctuation of the market price. Fluctuating prices are like a swerving car they have trouble accelerating in one direction because they are not moving in a straight line. To illustrate this concept, here s an example of how the market price moved over the duration of each candlestick: Can you see that for the left candlestick, prices fluctuated a lot more compared to the candlestick on the right? In this way, long shadows indicate a greater hesitation of prices moving in one direction. 12

13 Said another way: There is strong momentum when the market price moves in one direction without hesitating or fluctuating too much. Got it? So now, by simply looking at the real body and shadows of a single candlestick, you can gauge the strength (i.e. momentum) of a price move. Good question! Umm, that s nice and everything But how do I use this information? Here s the thing you should know: the stronger the price momentum, the less likely the market price will reverse immediately afterwards. Think of price momentum as price inertia. Like a speeding car, the faster the market price moves, the harder it is to slow down, stop and turn around. In other words: When price momentum is strong, the market price is more likely to continue moving in the same direction. Here are two chart examples that show how a candle with strong momentum can predict future price moves: 13

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15 So remember: the stronger the price momentum, the more likely prices will continue moving in the same direction. There is however, one exception to this. When a high-impact economic indicator is released, the market price can move with strong momentum in both directions, in succession. During such periods, price momentum is no longer a reliable predictor of future price moves. Economic Indicator Releases In the world of finance, economic indicator releases are highly-anticipated events that are closely watched by the professionals. You should avoid trading during these periods (especially if you re new), as they involve macroeconomic topics that most beginner traders are unfamiliar with. Important: All types of technical analysis (including candlestick analysis) is likely to be ineffective during high-impact news releases. You can get the schedule of the economic news releases at this website: Before taking a trade, you are strongly advised to first check this website to ensure you are not entering the market ahead of a high-impact release. Here are a couple of examples that show how price momentum can be ineffective during these periods: 15

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17 When Momentum is Lost Most of the time, the market price moves with relatively weak momentum. And as you ve learned in the previous section, weak momentum is indicated by a candlestick with a small real body, and/or long shadows. But what does weak momentum mean? For the most part, it indicates market indecision. This means that there is no consensus amongst the buyers and sellers, so the market price remains more or less stagnant. And as you might have guessed, this is not a good time to enter a trade, especially after prices have remained stagnant for some time. A common type of candlestick you ll see during periods of extreme indecision is the Doji: The Doji looks like a cross because the opening price is the same (or very near to) the closing price. Therefore, this candlestick has effectively no real body. 17

18 Many trading books and websites claim that a Doji candlestick indicates a change of market direction, and that you should enter a trade in the opposite direction of the prior trend. But now that you know that a Doji candle merely indicates indecision, do you agree with this saying? Not necessarily, right? Well think about this: Should you enter a trade when the buyers (or sellers) are pushing prices in one direction (i.e. with momentum)? Or when the buyers (or sellers) are unable to push prices in either direction (i.e. with indecision)? When you learn the facts and start thinking for yourself, you ll find that much of the information published on the internet is dead wrong! As you might have realised, this book is not about telling you what to do it s about teaching you to think for yourself. The concepts we ll cover here are the mental tools and frameworks you ll need to make your own decisions. In my opinion, this is the only effective way to learn to about trading. Now if you re ready to move on to the next section, let s continue. 18

19 Long Top/Bottom Shadow OK, so we know that a candlestick with long shadows indicates market indecision but what if only one of the shadows is long, like this? When we see a candlestick with only one long shadow, it means that one side of the market (i.e. buyers or sellers) tried to push prices in their direction, but the other side has pushed back. In trader-speak, we say that one side of the market has been rejected. Let s see what this means 19

20 Rejection A single long top shadow indicates that the buyers in the market tried to push prices up, but the sellers are strong enough to push prices back down again. Since the buyers in the market were unable to keep prices at high levels, we say that a long top shadow represents buyer rejection. Conversely, a long bottom shadow indicates that the sellers in the market tried to push prices down, but the buyers were strong enough to push prices up again. 20

21 Because the sellers in the market were unable to keep prices at low levels, we say that a long bottom shadow represents seller rejection. When we see a rejection candle after prices have been trending (i.e. moving in one direction) for some time, it means that the trend is likely come to a halt. In other words, a rejection candle indicates the likely exhaustion of a prior price trend. In the chart below, notice how the rejection candles predicted the end of the prior price trend. 21

22 Unlike a candlestick with strong momentum (where one side of the market is already dominating the other), a rejection candle indicates a potential turning point where one side just begins to dominate the other. Thus, rejection candles indicate a higher chance of prices moving in the opposite direction of the shadow. Reverse Rejection Reverse rejection refers to a situation where a rejection candle incorrectly predicts a turning point of a price trend. The best way to understand how this works is with an example: Here, we see the market moving down. The latest candle shows a long bottom shadow, indicating seller rejection. This may be a good time to enter a buy trade. 22

23 But what happened next? Three candles later, we see that prices have NOT continued to move up. This is unusual because prices typically reverse within 2-3 candles after a rejection candle. When we don t see a quick reversal after a rejection candle, it means that the rejection signal is likely to have failed. In that case, prices are now likely to keep moving in the same direction as the prior trend (in this case, down). It would thus be a good idea to close any buy trades, and sell instead. Let s see what happens 23

24 Indeed, prices continued to fall and any sell trades would now be in profit. This is a simple, yet effective method of quickly cutting losses and getting on the right side of the market. As a rule of thumb, reverse rejection occurs when prices close halfway (or more) of the long shadow of the rejection candle. 24

25 OK great! But which of these concepts is the most accurate? Be careful not to fall into the trap of thinking in terms of most accurate and least accurate. I say this because trading with candlesticks is NOT about looking for a single high-probability signal. Instead, we want to look out for multiple signals that all point to the same prediction of where prices are likely to go. It s about accessing the situation based on both confirming and conflicting signals, and then making a judgement call about where prices are most likely to move next. We ll talk more about this in the later sections. Summary 1. Strong price momentum indicates a higher probability of prices continuing to move in the same direction. 2. Weak price momentum indicates market indecision. 3. A rejection candle indicates a higher probability of prices moving in the opposite direction of the shadow. 4. Reverse rejection indicates a higher probability of prices continuing to move in the direction of the existing trend. 5. Successful trading involves multiple confirming signals, not a single highprobability signal. 6. Avoid trading just before, and during the release of high-impact economic indicators. 25

26 Relative Candlesticks While a single candlestick helps us identify the strength of a price move, a group of candlesticks helps us understand the context of that price move. Allow me to illustrate this with a question: If we look at this single candlestick, we might say that the market is bullish. However, if we take a step back and look at the candle before it then we might come to a different conclusion. 26

27 This is essentially what relative candlestick analysis is about. It shows us how current prices are moving in relation to past price movements. As seen in this example, a single bullish candle doesn t necessarily mean the market is bullish. To make a better judgement, we ll have to take a look at the bigger picture. This is why single candlestick analysis is not enough we have to learn about relative candlesticks too. Relative Momentum Remember how we talked about momentum before? The same principle can be applied to a cluster of candlesticks. Here s how. Let s assume that we see a candle with strong bullish momentum, and enter a buy trade: 27

28 Some time later, prices continued moving in the direction of the bullish momentum: At this point, the bullish momentum remains strong, as the upward movement is relatively steep. Eventually though, we will see a slowing of this momentum. The market price will not continue moving with strong momentum forever. To identity weakening momentum, we ll be looking out for the following signs: the price move becomes less and less steep; and/or the candlestick real bodies get smaller Let see what this looks like 28

29 When an ongoing trade is sitting on a paper profit, slowing momentum is the first signal for us to consider closing (at least) a portion of the trade, and booking some profits. Why? Because there is now a higher chance of prices reversing from there. Note: This does NOT mean we should taking a trade in the opposite direction (in this case, to enter a new sell trade). In most cases, weakening momentum alone is not a good reason to enter a trade. Remember, we want to have multiple confirming factors before making that decision. 29

30 Next, we see what looks like a price reversal. If we didn t notice the slowing down of momentum and closed our trade earlier, we would have lost a big portion of our profits by now! Now, in the chart above we can see that the most recent candlestick is showing strong momentum to the downside, so we know there s a higher chance of a complete reversal (rather than for prices to bounce back up from here). And if we did not close the buy trade earlier, this would be the time to do so. Now take a few moments to go through the example again. There are a number of things going on at the same time and you want to make sure you thoroughly understand the concept of relative momentum before moving on. 30

31 Understanding Candle Patterns (without memorising) If you re been following so far, this next question should be easy for you to answer. What does this situation tell you about where the market price is more likely to be headed? Up or down? Take a moment to think about your answer based on the concepts we ve covered... Ready for the answer?.... Did you guess that prices are more likely to move up? 31

32 Let s examine why: Candles 1 and 2 indicate that the market is on a downtrend. But although candle 1 shows strong downward momentum, we can see a slowing down of this momentum in candle 2 (candle 2 has a smaller real body). Next, we see candle 3 showing strong upward momentum, as it (more than) covers the body of candle 2. This is an indication of weakness of the sellers in the market, as the buyers completely overwhelm them. You may realise that Candles 2 and 3 form a candlestick pattern called the engulfing pattern but now that you understand the basics of price action, you won t have to memorise any patterns at all. All you have to do is apply the concept of momentum, and you ll be able read candle patterns right away. Everything you need to know is already in your head! 32

33 Anchor Candles Occasionally, prices will reverse without any prior indication. In those situations, how do we know whether a counter-trend move is going to be a temporary pullback, or a full-blown reversal? Here s the trick You ll first have to identify what I call an Anchor candlestick. An Anchor candle is basically a candlestick with a significantly longer body than the surrounding candlesticks. Example: 33

34 Another example: There s no scientific rule to determine an Anchor candlestick. Simply use your judgement they re pretty easy to find. If you re having trouble looking for one, it probably isn t there. Now here s the rule about Anchor candles: When a candlestick closes past the opening price of the Anchor candle, a reversal is likely to happen. If not, it s market price is likely to just be making a temporary pullback. Here s what I mean 34

35 Here, we see prices moving up and forming an Anchor candlestick. Two candles later, the market closed past the opening price of the Anchor, and the prices subsequently reversed. Here s another example: 35

36 Another example: The market moved up with a strong anchor, and then dropped back down. This looks like a reversal but is it really? What do you think? Let s see what happened next 36

37 Ah it turned out to be a strong pullback! Could we have known it was probably a pullback beforehand? The answer is yes! If you look closely, the market price did not close past the opening price of the Anchor candlestick. 37

38 Here s one last example: This one is pretty straight forward. Prices dropped significantly, forming an obvious Anchor candle. Then two candlestick later, the market closed past the opening price of the Anchor, confirming the reversal. Subsequently, prices continued in the direction of the reversal. Take a moment now to open up your trading charts and see if you can identify any Anchor candles. Notice how the market price threatens to reverse, but only truly does so after there is a close past the opening price of the Anchor. Do this exercise a few times and you ll see how this is a reliable way to tell a reversal apart from a mere pullback. 38

39 Reversal Candlestick Psychology This is a simple yet effective method of identifying where a ready pool of buyers and sellers are in the market. Did you know that a single candlestick (on its own) is by its nature, an area of support/resistance? Let s take the example of a bull candle: A bull candle tells us there is a larger volume of buyers than sellers (nothing new here). But this information is based on something that has already happened. How does this help us make trading decisions in the future? Well, a bull candle indicates the range of prices where there is a ready pool of sellers in the future. Does this make sense? OK, imagine You ve just entered a buy trade, and prices start moving up that s great! Your trade is making money. 39

40 Soon, however, you see that prices are starting to move back down again your trade is still making money, but the market price is now moving towards to your entry point. What would you do? If you re like most traders, you ll hang on to the trade and wait for prices to move up again. But what happens when prices continue to move even closer to your entry point? What do you think most traders would do in this situation? They will move their stop loss to the break-even price. By now, most traders would be looking to get out of the trade with no loss if prices move back to their entry price. And so, all the traders who entered a buy trade within this bull candle are now looking to SELL to close the trade. In tho way, a bull candle represents the range of prices where the previous buyers would be looking to sell to close their trade. A bull candle indicates the price range where a group of traders is looking to SELL. A bear candle indicates the price range where a group of traders is looking to BUY. 40

41 On a practical level, it would be too tedious to apply this concept to every candlestick on the trading chart. A better (more effective) way to use this concept is to apply it to situations with a series of consecutive bull or bear candles. Example: Prices have been falling sharply with a series of consecutive bearish candles. This is where there is a large pool of traders waiting to close their sell trades (with buy orders). And now, the latest (bullish) candlestick shows that the selling momentum is slowing down. If the buyers in this market manage to push prices high enough, the previous sellers will exit their trades (with closing buy orders) and add to the buying pressure. 41

42 When this happens, the market will shoot up quickly, like a row of dominos as each closing trade pushes the market price even higher. This simple but rarely applied knowledge will help you decide if you should keep an existing trade open, or if you should consider opening a new trade to take advantage of the situation. (By the way, did you also notice the bearish Anchor candle? Did you see how a close above its opening price signalled the reversal?) Remember: Although I m describing each concept separately, in practice they should all be applied simultaneously. 42

43 How Reversal Patterns Work Reversal candlestick psychology is one of the reasons why reversal patterns are such effective predictors of price reversals. Here s why: In the above diagram, the bullish engulfing pattern has formed and the market is now moving up. The previous sellers (from the bearish candlestick) are now sitting on paper losses, and will be looking to exit their trades at break-even (or so they hope) with buy orders, thus forming an area of support. If prices move back down into the range of the bearish candlestick body, the sellers will quickly close their sell trades (with buy orders), which pushes the market price up again. 43

44 Similarly, after a bearish engulfing pattern has formed and prices continue to move down, the previous sellers (from the bullish candlestick) are sitting on paper losses and will be looking to exit their trades at break-even with sell orders, forming an area of resistance. If prices move back up into the range of the bull candlestick body, the previous buyers will immediately exit their trades (with sell orders), pushing the market price down again. This is a useful concept to consider when looking to enter or exit your trades. 44

45 No Man s Land The concepts we ve covered so far involves the crucial periods when the market signals to us where it s likely to go in the near future. However, these signals do not often appear. In fact, most of the time the market price will move randomly and will not show a tendency towards any particular direction. This is when the market is in no man s land, and we do not want to be entering trades during this period. So how do we know when the market price is in no man s land? For now, we can simply assume no man s land to be in any situation when the price momentum is weakening. As traders, our job is to be constantly aware of how the market price is moving: is it moving with strong momentum? Or is it mindlessly fluctuating about in no-man s land? Our assessment of the situation will determine if we should be looking to enter a trade, or to be staying out of the market. All right! This wraps up the fundamental concepts of price action. Let s now put these concepts to the test! 45

46 Reading Price Action There are 4 steps to reading price action: 1. Observing how prices moved in the past 2. Observing how prices are moving now, in relation to the past 3. Predicting where prices are not likely to go next 4. Considering the possibilities of where prices may go next The first two steps require us to interpret the current state of the market: Who is in charge of the market right now? The buyers or sellers? For how long have they been pushing prices in their direction? How strong is the momentum? Does the momentum look sustainable? Based on our answers to these questions, we can estimate where the market price is not likely to move to, in the immediate future. With those options eliminated, we are finally left with just a few of possibilities of where prices are likely to move to next. Armed with this knowledge, we will be in a much better position to enter and exit our trades with precision. Let s give it a go, shall we? 46

47 Time for an exercise! Now let s go through an example to see if you re on the right track. The recent price action indicates a mostly ranging market: The last two (bear) candles indicate that the market price is moving down but if we look at the overall picture we can see that there is no strong momentum in either direction. So at this point, it s safe to say that the market is right now in no man s land. And what do we do when the market is in no man s land? That s right, we ll stand aside and do absolutely nothing. Let s wait for the market to first make its move. 47

48 Suddenly, we see a huge bear candle. The market price has moved with strong momentum, and this is when we will prepare to enter a trade. For now, we won t be concerned about specific entry techniques. At this stage, the most important thing is to know how to: Interpret what the market is doing Tell when we shouldn t be entering a trade Tell when we can consider entering a trade So let s access the current situation 48

49 Who is in charge of the market right now? The buyers or sellers? The sellers. For how long have they been pushing prices in their direction? Just in the latest candlestick. This is the first strong bearish move. How strong is the momentum? It s the strongest move in recent history. Does the momentum look sustainable? Yes. There is no indication of the slowing down of momentum. At this point, we can consider taking a (sell) trade because all the signs point to a follow-through of the bearish momentum. For the sake of practice, let s hypothetically assume that we enter a sell trade right here. Now let s see what happens next 49

50 Yes! The trade is in profit! But we must now be careful, because the bearish momentum looks to be slowing down. We know the momentum is slowing down because: 1. The bearish candle bodies have gotten smaller; and 2. A bullish candle approximately the same size of the previous bearish candle has formed. Now, let s access this new situation. 50

51 Who is in charge of the market right now? The buyers or sellers? The sellers continue to be in charge. For how long have they been pushing prices in their direction? Prices have been pushed down over the past 4-5 candles. The bulls have not been able to push back with much strength at all. How strong is the momentum? The overall (big picture) bearish momentum remains strong, but the latest 1-2 candlesticks indicate that the momentum is slowing down. Does the momentum look sustainable? At this point, yes. As long as we do not see a strong bullish candle or a reversal signal, the bearish momentum is more likely to continue, than not. With the slowing down of bearish momentum, there is now a lower chance of the market price continuing to move down, compared to when we first entered the trade. Thus, we will now be looking out for signs of a bullish reversal. (Hint: where is the latest Anchor candle?) 51

52 Our priority is to protect as much of our paper profits as possible, and we will do this by closing our (sell) trade at the first sign of a potential price reversal. Let s see what happens next The market made a (bullish) pullback but the pullback has now flattened out. What do we do here? Well, let s access the situation 52

53 Who is in charge of the market right now? The buyers or sellers? On the whole, the sellers remain in in charge. The buyers have only managed to push prices back up approximately 30% of the bearish move. For how long have they been pushing prices in their direction? They have not been able to push prices back in their direction for the past 12 candlesticks. How strong is the (bearish) momentum? The bullish pullback looks relatively significant and has clearly slowed down the initial bearish momentum. Does the (bearish) momentum look sustainable? Prices have not closed above the opening price of the latest bearish Anchor candle (you spotted it, didn t you?), but it is coming close to doing so. As long as prices don t make a further bullish move, the bearish momentum is more likely to continue than otherwise. With no indication of a reversal, we can continue holding on to our sell trade for now. Let s see what happened next. 53

54 As it turns out, the bearish move soon resumed and the market price made a new low. However, we now see that the bearish momentum has weakened again and the latest candlestick shows strong bullish momentum. So what do you think? Is this a reversal? Should we close our sell trade here? (Hint: where s the latest bear Anchor candle?) Let s take a look at what happened next 54

55 As it turns out, the market price did not close above the opening price of the latest Anchor candle, and the market sellers are still going strong. So is now a good time to enter a new sell trade? Let s take a step back and look at the overall picture by comparing the strength of the initial bearish move with the recent bearish move. 55

56 Do you see how the latest bearish move is significantly weaker than the initial bearish move? If we step back and look at the bigger picture, we can see that the overall bearish momentum has clearly slowed down. So unless there s a compelling reason for the market to keep moving down from here, now is not a good time to be entering the market with a new sell trade. In fact, this looks like a good time for us to close our initial sell trade to book the profit! 56

57 Now let s continue on So what happened here? First of all, prices continued to move down slightly but we soon see one reversal signal followed by another: the market closed above 2 Anchor candles. And, notice the bullish strength of the latest candle. These are all signs that point to the growing strength of the market buyers. At this stage, we should be very concerned about a (bullish) reversal! 57

58 As it turns out, our concern was warranted. Prices continued to move up as we expected. How did we know beforehand that this was likely to happen? Did we have a magic crystal ball? Nope we clearly saw weakening bearish momentum, followed by prices closing above the opening price of 2 consecutive bearish Anchor candles. All the signs were there! And now, we see a long top shadow on the latest candle so what do you think is most likely to happen next? 58

59 Did you guess that prices are likely to reverse back down again? And notice, how prices consistently closed below the bullish Anchor candles so we know that the market price is most likely to continue moving down from here. Can you see how we use the same few concepts over and over again to read the market? We don t have a crystal ball to predict market prices, but this is pretty darn close! So keep applying these concepts, and your trading will improve by leaps and bounds. 59

60 Candlestick Trading Principles As you practice trading with candlesticks, there are two principles you need to be aware of. These principles will help clarify many of the market situations that you may be confused or uncertain about. 1. Momentum Candle Completion This is something often ignored by amateur traders when they see a market move and try to chase it. Here s a typical example on the 1 hour chart: The time now is 4.30pm 60

61 Amateur traders get excited when they see the market move and scramble to enter a trade. But in their excitement, they forgot that the latest candle has not completely formed yet! And here s what happens when the hour is up: The time now is 5.00pm The candle has fully formed, and prices shot back down again. This was a false momentum move! If those traders had waited for the hour to be up before considering to take the trade, they would have avoided this unpleasant situation. 61

62 So here s the principle to follow: Only trade off a momentum candle after it closes. This simple idea will save you from lost capital and unnecessary frustration down the road. 2. Multiple Time Frame Perspective This is another principle that new traders tend to be unaware of. Allow me to illustrate this principle with a question: Try to answer the question as best you can... Ready for the answer? 62

63 Of course, this is a trick question well, sort of. The point I m trying to make here is that sometimes, you can t tell how bullish or bearish a candle is simply by looking at a single time frame. Let s now take a look at these 1 hour candles by zooming in to their respective 15 minute time frames. Take a moment to compare candles A and B this time: Although they look the same on the 1 hour time chart, when we look at the 15 minute chart they depict different situations! In this case, candle A is clearly more bullish. 63

64 This example illustrates the importance of looking at the market from different perspectives (i.e. on different time frames). It s how we can get a more detailed picture of market price moves. Where possible, we want the to see the same signals across different time frame charts before opening or closing our trades. Parting Words Before we get to the end of this book I would like to emphasise again, that although we ve covered each concept here separately, in practice we will apply them all at the same time. Successful trading is about taking action only when the odds are in your favour and you now have the knowledge to identify those situations. Often, the candlesticks will show multiple signs of where the market price will move next, and this gives you a huge advantage over other traders who don t understand the language of price action. With time and practice, you ll gain an appreciation of the likelihood of the market price moving in both directions, and this is when you ll have gained the skill of uncovering the story of the market simply by looking at a bare price chart. Keep practising these concepts, and the future direction of the market will soon become intuitive to you. 64

65 Now Go Make Some Money! Congratulations on making it to the end of the book. The concepts you ve learned have been carefully selected and explained to give you the best chance of success so please follow them carefully! Take the time to re-read this book a few times over, and make sure you understand everything thoroughly. When you re ready, start practicing and it will all come together nicely for you. Good luck, trade safely, and I ll talk to you again soon. All the best, 65