If you missed the excellent Steve Nison Webinar last week, I’ve been able to get a recording for you: http://www.candlecharts.com/temp/nisoncandleprofits/ It’s well worth watching. If you are even remotely interested in trading with candles, this is a chance to get some tips from the GURU of candle stick charting

Well, I hope everyone had a good Easter break! After a few days off from trading over the holidays, I’m back at the trading desk and ready to review some more trades that I’ve taken. Here is the trade I took yesterday.

The trade was on the GBPUSD and was long. The entry signal was the large bullish candle that I’ve circled on the chart below. This candle came off the 38.2% Fibonacci. The candle was however quite large and luckily for me happened whilst I was away having lunch. I say lucky as it allowed me to get in at a better price on the retracement. Normally this wouldn’t have been the case, I would have gotten in with a half sized position due to the large stop required, but I guess sometimes lady luck smiles on you! I entered the trade on the close of the second bearish candle in the chart after it failed to make it past the resistance/support level of the 38.2% Fibonacci(1.5156). I’ve circled and marked this region on the trade as retracement. Because I got into the trade at a much better price than if I had gotten in on the first trade signal, I was able to take a full size position and keep a small stop loss. I set my original target profit to the 78.6% Fibonacci and let it run. Unfortunately, I had to go out and wasn’t able to stick around to watch the trade, and so I modified my take profit to the potential resistance point 12 pips below the Fibonacci 1.5240). The trade ended for me at this point with a profit of 84 pips. All in all, a nice welcome back from the holidays!

Well, yesterday’s trade didn’t go exactly according to plan.  As I mentioned I was aiming to get to the 38.2% Fibonacci, which would have been worth about 110 pips.  Things were going really well, and I think I got as close as 10 pips away from my target and then the market changed.  Luckily, once I was up I put a trailing stop-loss in place in case things didn’t go my way, and I was stopped out for a profit of 61 pips.  A good result, but it would have been better if I had bagged all the pips on offer.

This just goes to show that sometimes, everything is looking good but the market can change on you.  Reviewing the trade today, I think I would have done the exact same thing.  At the time the market changed, the stochastic wasn’t indicating that the market was overbought, and so I feel that I played the trade correctly; but I am glad that I put that trailing stop loss in!

I know its a bit late for anyone to act on, but I thought I’d go over a classic trade that occurred yesterday on the JPYUSD.  As I said, too late for you to capitalise on, but it helps to become familiar with what a good trade looks like, and what to look out for when deciding when to exit the trade.

As in all trades, you want to be trading in the direction of the longer term trend; in this case, we are looking to buy.  The next thing we need is to identify a good entry point.  We use a variety of indicators to help us, but once we get into the high probability areas (high probability of the market direction changing) we need a signal to tells us to enter the trade.  I look for candlestick patterns to give me that signal.  In this example, the candlestick pattern that signaled the entry point was the hammer candle that I’ve highlighted on the chart below.  So now that we’re in the trade; we need to try figure out when to take our money.  Using various resistance points we can identify potential places where the trade may turn against us.  In this chart, the first potential place was the 50% fibonacci.  This line coincided with a previous resistance point, so we could suspect that it may happen again.  Again, we look to the candlestick patterns for help.  In this trade, the candlestick smashed through the resistance point and closed above it.  As it was still climbing strongly, we would shift our attention to the next potential resistance point, on this chart the 61.8% fibonacci line.  As the candle approached this line, the price action retraced forming a bit of a spike high.  However, we should never really act solely on one candlestick pattern, we should usually wait for a confirmation.  The next candle again formed a spike high, so that was the signal that there was a high probability that the trade was about to turn.  These candlestick patterns coincided with overbought stochastic so all the signs were there to close the trade.  If you exited at the point, you would have made a healthy profit of around 60 pips.  If however you ignored the signals and remained in the trade you would have given a whole lot back to the market.

For all of you using the G7 trading system its been a really good week, especially if you combine those signals with the candlestick patterns I’ve been talking about these last few weeks.  The week has been so good, that I’ve hit my monthly pip target already and the month is only three days old!  I’m fairly conservative though and only aim for between 200-400  pips per month (equates to 10-20% return per month), and in the last three days I’ve netted 354 pips, so I am not going to trade real money for the rest of the month as I don’t want to give back my profits to the market!

Lets take a look at the week so far and the trades taken and why I took them.  All of the trades were on the EURUSD or GBPUSD.  Lets take the EURUSD first.

The first entry signal was a classic G7 trade, there was a touch on the bottom bollinger band, and oversold stochastic, and then a reversal candlestick, in the form of a bullish engulfing candle.  This also coincided with the 100% Fibonacci resistance level.  The signal was obviously a buy.  The next important thing, once in the trade is to try determine where a likely take profit point would be.  I set mine to the 50% Fibonacci as  that level coincided with previous support/resistance levels.  I got in at the close of the bullish engulfing candlestick pattern and set my take profit to the 50% fibonacci level so the overall result was 53 pips.  It turns out that this was a good place to take the profit as the next candle was a reversal candle and if I hadn’t taken profit I would have ultimately been stopped out as the price retraced dramatically.  That retracement however allowed me make more pips as the retracement ended with another great entry candlestick pattern, the huge spike low candlestick.  This candle bounced off the 100% resistance of the Fibonacci.  I bought straight after that candlestick closed, and again, set the target for the 50% Fib level.  The trade resulted with me earning an extra 86 pips.  The final EURUSD trade I took was off the double spike low candlestick pattern.  My target for this was the weekly high price, rought 1.3640.  It hit this price during the evening so I had a nice suprised when I logged in the morning to see an extra 74 pips in my account.  You can see these trades on the chart below.

I also took a trade on the GBPUSD.  This trade was more of a long term trade, with the aim of taking a larger pip haul.  I got into the trade at the beginning of the week after a large spike low candle.  The trade steady increased (although at some points after being 70 odd pips up, I was down to 10 pips) but I persevered and closed it this morning with for a tally of 141 pips.  The trade seemed to be meeting some resistance and to I figured better to take a guaranteed 140 pips than give it back to the markets.  You can see the trade in the chart below.  If you’d like to find out more about the G7 system,and how to trade forex, checkout The Traders Club, you can click on ‘The Traders Club’ name at the top of this post to take you to the site.

When utilising Japanese candlesticks to trade forex, being able to judge the sentiment of the market is of key importance in being able to predict when a reversal is likely to happen (important for both entering and closing trades).  In this next in the series of article about the use of candlestick analysis we will review an important type of candle, the doji.  When encountered in a strongly trending market, the doji can offer quite a powerful indication of shift in market sentiment.  When seen alone or in a two- or three-candle pattern it may signify that the current trend is losing steam and that a shift in market trend may be approaching.

The doji is formed when the opening and closing prices are the same and represents a market that is equally balanced between supply and demand.  This represents an indecisive market and could be an early indication that the current trend is losing momentum and a reversal could occur.  Although an ideal doji occurs when the opening and closing prices are the same, a candle may be considered a doji when the opening and closing prices are only slightly different.

Doji’s are however more significant in predictive value when they appear in an up-trending market than in a downwards moving market.  When found at the end of a long up-trending market they may signify an exhausted market, when appearing during a downwards trend they may not represent the same thing.  This is because a doji represents market indecision and indecision in an oversold market may merely be a resting point before the market continues to decline.

Doji candles have several nicknames depending on the placement of the open/close price on the session.  These specially named doji are still reversal indicators but may be more strongly associated with a change in market sentiment.  A couple of the ’special’ doji candlestick patterns are dragonfly doji (looks like a capital ‘T’) and the gravestone doji (an inverted ‘T’).

The dragonfly doji looks a capital ‘T’ with the open and close near or at the top of the candle.  This candle has good bullish implications as it indicates that the market fell sharply during the session (shown by the long lower shadow), but then rose back again under buying pressure to close at or near the sessions peak.  It resembles the hammer candlestick pattern, but lacks a real body.  The dragonfly doji is of particular importance for candlestick trading when it is found in an oversold market.  As mentioned previously, a doji that is found in a decline is normally of little importance, but the dragonfly is an exception.

The bearish equivalent to the dragonfly doji is the gravestone doji and it resembles an inverted ‘T’.  The open and close is found at the bottom of the long shadow and represents a market that was initially bullish but then prices fell and closed at or near the low of the session.  The gravestone doji when found at the end of a uptrend could indicate a trend reversal.

Trading forex can be risky business so we always want to stack the odds in our favour.  Therefore, when examining candlestick charts involving the doji pattern, it is important to wait for a confirmatory candle.  The doji represents a potential trend reversal (especially when found at the end of an up-trend), but it is not as strong an indicator of reversal than the previously discussed candlestick patterns.  In order to consider the doji a valid trend reversal indicator, the subsequent candle should close at a lower price than doji (remember we only trade off the doji when it is seen in an uptrend).

Below are some examples of when to use and not to use the doji.  In the first example (moving from left to right), a doji appears during the down trend (not an ideal doji as open and close price differ slightly).  If you waited for the next candle to confirm the trend reversal, you may have been tempted to go long, but remember, don’t trade the doji in a downtrend!  If you had entered the trade you would have been stopped out.  In the second example, another doji appears, this time in an uptrend.  If you entered this trade straight away, again you would have lost money.  You need to always wait for a confirmatory candle, and in this case, the subsequent candle closed at a higher price than the doji, invalidating the potential trend change.  In the final example on the far right, we see a gravestone doji.  This is quite a strong indicator of trend reversal, and as the second candle closed lower than the doji, it represents a valid trade.  In this case I probably would have waited for the price action to retrace before entering the trade as the required stop would have been quite large (above the top of the doji).

Ever been in the situation where you have 3 forex entries….all against the same currency? So what do you do now? Enter them all knowing that they will probably all go in your direction or all against? Or what about if there are no entries so you scan every currency (only about 12 on my list) and every time-frame to try find a trade … knowing you are breaking all the rules?

These articles will give you a bit of insight into how I have diversified my trading portfolio and spread my risk using shares spread betting.

Basic Differences: Forex vs shares spread betting

• I find I don’t have to search for trades any more. I day-trade the NYSE (+-3500 companies) and the LSE (+-2500 companies). I know what you thinking – now i have created a new problem! With so many stocks how do I find my trade setups? I can’t search through them all. In the upcoming articles I will explain my methods of identifying possible trades.

I hope this helps you understand the basic differences between these 2 trading types.

Next Article:

Getting Started: I will show you how to get up-and-running, which charts and broker I choose and why.

In this next article brought to you by The Traders Club on using candlestick analysis to predict changes in the forex market,  I will review some of the fundamental candlestick patterns used in forex trading.

In order to be successful in the financial markets you need to be able to predict when the current market trend is going to change.  The use of candlesticks can give you forewarning of a change in market direction but is dependent on the correct interpretation of the candlestick patterns.  There are two types of candles, bullish candlestick patterns that signify an upwards moving market and bearish candlestick patterns that signify and downwards moving market; i.e. with a bullish candle, the closing price is higher than the opening price and visa versa for a bearish candle.

In any trading situation, the key to being successful is being able to recognise possible trend reversals.  As you become more familiar with the different candle lines and patterns, you will notice how correct interpretation of the candlestick chart offers the trader an early heads up on a possible trend reversal; in fact, the large majority of signals given by candlestick patterns are reversal signals.  As the common goal of any trader is to buy low and sell high (or in the case of short selling, to sell high and buy low), being able to accurately predict when to buy or sell is tantamount to success.

There are a number of different types of candlestick patterns, too many to discuss in this article but I will review some of my personal favourites for trading off.

Hammer/Hanging man


The hammer or hanging man candle is a type of spike candlestick pattern.  When found at the top of a trend it is called a hanging man, whilst if found at the bottom of a trend it is called a hammer.  In order for this to be considered a valid reversal signal, it needs to occur at the end of a trend.  When you come across a hanging man at the end of a trend, it is a great entry signal as the absence of a long wick allows you to enter the trade with a much smaller stop loss.

Shooting star/inverted hammer

When found at the top of a trend, this candlestick pattern is called a shooting star, at the bottom of a trend it is called an inverted hammer.  As before, the appearance of this candle should only be considered a valid reversal signal if it occurs at the end of a trend or at a resistance level.  Like the hanging man above, a valid shooting star allows one to enter a position with a very small stop loss.  Spike high and spike low candlesticks like these are reversal signals at both the top or bottom of a trend.  Surprisingly, the direction of the spike is not important as a reversal signal, but for better risk/reward, I prefer the spike to be in the direction of the reversal so to minimise my stop loss.

Engulfing candles

An engulfing candle is another great reversal candle.  The engulfing candlestick completely covers or engulfs the preceding candlestick, but differs in the direction. Typically, the engulfing candle will cover the entire body of the preceding candle, but in some cases the wick of the candle maybe included when determining the signal.  Note, that the engulfing candlestick does not have to engulf the entire price range of its neighbour, but does need to cover its body.  Engulfing candlesticks are considered to be strong indicators of trend reversal.

Dark cloud cover and Piercing patterns

The dark cloud cover candlestick pattern (top image) is a bearish reversal pattern and is found at the top of a trend.  It is similar to a bearish engulfing pattern except that its body does not completely engulf the previous candle. In order to be considered a dark cloud cover it needs to have retraced at least half way down the body of the previous candle.

Piercing patterns are the opposite of dark cloud covers and are found at the end of a downwards trend. They are bullish reversal candles, and like the dark cloud cover, for it to be considered valid, it needs to have retraced at least halfway up the preceding candles body.  Piercing patterns and dark cloud covers are more difficult to spot but are reliable indicators of trend reversal.

These are a few of my favourite candlestick formations that I use in forex trading.  To summarise, the spike candlesticks (shooting star, hammer, hanging man, and inverted hammer) are small bodied candles with long wicks, and when found at the end of a trend provide a good reversal signal.  When the spike is in the direction of the reversal a low risk trade can be taken as the stop loss will be very small.

Engulfing candlesticks are strong reversal signals and their body completely engulfs the body of the preceding candle but in the opposite direction.

Dark cloud covers and piercing patterns are found at the end of a trend (dark cloud cover at the top, piercing pattern at the bottom), are in the opposite direction to the previous candle, and their body has retraced at least half the previous candles body.