Table Of Contents

What Is A Bar Chart? 6

Bar Chart Patterns 7

Inside Bar Pattern 8

Outside Bar Pattern 9

Two Bar Reversal Pattern 11

Three Bar Reversal 12

Key Reversal Bar Pattern 13

Exhaustion Bar Pattern 14

Island Reversal Pattern 16

Summary 17

Reading a Forex Chart with Candlesticks 17

Pros and Cons of Using Candlestick Charts Compared to Line and

Bar Charts 18

Different Types of Candlestick Patterns Convey Different Messages 19

Candlestick Chart Reading Like a Pro 23

Combining Technical Analysis Indicators with Candlestick Patterns 26

Conclusion 27

What is Price Action Trading? 27

Trend Identification 27

Avoiding Consolidations 28
Finding Reversals 28

Analyzing Corrections 28

Popular tools when trading price action 28

Support and Resistance 29

Trendlines 29

Channels 30

Candlestick Patterns 31

Doji 31

Hammer and Hanging Man 32

Inverted Hammer and Shooting Star 32

Chart Patterns 33

Double Top and Double Bottom 33

Head and Shoulders and Inverted Head and Shoulders 34

Rising Wedge and Falling Wedge 35

In Conclusion 37

What are Forex Trendlines 37

1) Bullish Trendlines 37

2) Bearish Trendlines 37

How to Draw a Trendline 38

Three Important Rules for Building Trendlines 39

Trading Trendlines 41

Trading the Trending Move 41

Trading Corrections of Trendlines 42

What is a Trend Correction in Forex? 42

Trading Trendline Breaks and Reversals 44

Conclusion 46

What is Support and Resistance? 47

What is the difference between a support and a resistance? 48

How to find support and resistance levels? 48

How to set entry/exit points at support and resistance levels? 50

How to trade support and resistance? 52

What are Forex Reversal Patterns 55

Types of Reversal Chart Patterns 55

Top Candlestick Reversal Patterns 55

Doji Candlestick Pattern 55

Hammer / Shooting Star Candlestick Patterns 56

Engulfing Candlestick Pattern 58

Trading Rules for Reversal Candle Formations 59

Trade Entry 59

Stop Loss 60

Take Profit 60

Top Reversal Chart Patterns 60

Double Top and Double Bottom 60

Head and Shoulders 62

Forex Reversal Strategy 63

Conclusion 64

Technical Chart Patterns 65

What Do Chart Patterns Tell Us? 66

Top Trading Chart Patterns in Technical Analysis 66

Head & Shoulders Pattern (H&S) 66

How to Trade the Pattern 68

Inverse Head & Shoulders Pattern (IH&S) 69

How to Trade the Pattern 70

Double Top Chart Pattern 71

Combining Indicators & Patterns 72

Example of Bearish RSI Divergence with Double Top Pattern 73

Double Bottom Pattern 74

Combining Patterns and Indicators 75

Double Bottom & Stochastics Example 75

Considerations When Trading Chart Patterns 77

Trading Pullbacks Within A Trend 77

Identify the Underlying Trend 80

Identify Potential Pullback Reversal Area 82

Strategies for Entering the Market after a Pullback 84

Who was Richard Wyckoff ? 86

Two Rules of Richard Wyckoff 86

Wyckoff Market Cycle Theory 87

Accumulation Phase 87

Markup Phase 87

Distribution Phase 87

Markdown Phase 88

Accumulation / Distribution Price Spring 89

Three Laws of Wyckoff 89

Supply vs. Demand 90

Effort vs. Result 90

Cause vs. Effect 90

Wyckoff Volume Spread Analysis 90

How to Profit with Wyckoff Trading in Forex 91

Wyckoff Trading Strategy 92

Wyckoff Trade Entry 92

Wyckoff Stop Loss Order 93

Wyckoff Take Profit 93

Supply and Demand Trading 95

What are Supply and Demand Zones in Forex 96

Demand Zone 96

Supply Zone 97

Drawing Supply and Demand Zones 98

How to Find Supply and Demand Area on the Chart 98

Supply and Demand Analysis in Forex 99

Trading Supply and Demand with Price Action Trade Management 100
What Is A Bar Chart?

A bar chart is a charting style that displays the price action during a speci ed
period. Each bar shows that speci ed period’s opening price, high price, low
price, and closing price. This is also referred to as the OHLC prices. Unlike
candlestick charts which were introduced by a Japanese rice trader, bar
charts are an invention of the Western world. They were the primary
charting style used by American and European technicians prior to the
popularity of candlestick charts.

Each bar within a bar chart will display a vertical line and two horizontal lines.
The upper threshold of the vertical line represents the high price of the bar.
The lower threshold of the vertical line represents the low price of the bar.
The horizontal line on the left side of the vertical line represents the opening
price. And the horizontal line to the right side of the vertical line represents
the closing price. Below you will nd an example of a forex bar chart.

Many times the up bar will be represented by a green color bar, and the
down bar will be represented by a red color bar. This color coding makes it
easier for the chartist to quickly analyze the price action and differentiate
between an up bar which represents bullish activity, and a down bar which
represents bearish activity.

It should also be fairly evident that the longer the bar, the greater the range
for that speci c bar. That is to say that long bars represent a wider divide
between the high and low for that speci c bar, while short bars represent a
narrower divide between the high and low for that speci c bar.
As such, longer bars tend to represent higher volatility levels in the market
while shorter bars tend to represent lower volatility levels in the market.

Just as with candlestick charts, bar charts can help traders to better analyze
the price activity on the chart, and make informed decisions about whether
the market is more likely to continue moving in the same general direction,
or to reverse and move in the opposite direction. Bar chart analysis is a
combination of art and science. Price action traders can use the various clues
provided by individual bars and bar combinations to gauge the price
pressures in the market as a result of increased demand or supply at any
given time.

Bar Chart Patterns

Bar chart pattern analysis is an excellent way to gauge short-term sentiment

in the market. Most bar patterns consists of 2 to 3 individual bars that
combine to form a speci c formation. Bar patterns can be classi ed as
continuation patterns and reversal patterns. As the name suggests, a
continuation pattern is expected to move prices in the direction of the
current trend following the completion of the pattern. Along the same lines,
a reversal pattern is expected to retrace or reverse the direction of the
current price movement.

We will discuss some of the most important bar chart patterns that traders
should be aware of. This includes the inside bar pattern, outside bar pattern,
two bar pattern, three bar pattern, key reversal bar pattern, exhaustion bar
pattern, and the island reversal bar pattern.

Now although you can use these various bar patterns on any timescale, they
are far more reliable on higher time frames such as the four hour and above.
They tend to work best on the daily chart, as the daily price bar has special
signi cance in the market. Additionally, the more active a particular market
is in terms of volume, the more reliable the bar pattern will tend to be.

As such, the best use of bar patterns for market analysis occurs when you are
applying them to the daily or weekly charts, and on a very actively traded
market instrument. Some examples of very liquid markets would include
currency pairs such as EURUSD, GBPUSD, and USDJPY. For traders who
participate in the futures market, some examples would include the E-mini
S&P, Crude Oil, Gold, and Treasury Bonds.
Inside Bar Pattern

An inside bar pattern can be a continuation or reversal pattern based on

which side a breakout from the pattern occurs. The inside bar pattern is a
two bar formation that presents a market condition wherein traders are
displaying indecision and reluctance. This is because the rst bar in the
pattern, which can either be, a bullish bar or a bearish bar is relatively normal
in size, and the second bar, the inside bar, is completely engulfed by the rst
bar. As such, there is reduced volatility within the second bar, which is
building energy for a potential breakout.

Let’s look at an example of an inside bar pattern. Below you can see an
illustration of the inside bar.
This example shows a condition wherein the initial bar is a not bar, and the
inside bar is a down bar. But keep in mind, that any scenario with regards to
an up bar or down bar will be acceptable within this formation. The most
important criteria is that the second bar, the inside bar, be completely
engulfed by the rst bar. In other words, the high of the second bar should
be below the high of the rst bar, and the low of the second bar should be
above the low of the rst bar.

Going back to our illustration above, we can see that in this example the rst
bar is an up bar, where the close is above the open. And then the second bar
is a down bar wherein the close is below the open. Notice how the high of
the second bar is lower than the high of the rst bar, and the low the second
bar is higher than the low of the rst bar. As such, this would be considered a
valid inside bar formation.

Typically, the way that you would go about trading and inside bar formation
is to wait for either a break above the high of the second bar to enter long, or
to wait for a break below the low of the second bar to enter short. Once the
breakout occurs either to the upside or to the downside, the price should
follow through in the direction of the breakout for at least several bars or
more.

Outside Bar Pattern

Outside bar formations are commonly referred to as engul ng patterns in

candlestick analysis. Outside bar formations are considered reversal patterns
and will typically occur at the end of an extended price move. A bullish
outside bar formation would generally occur after a downtrend, and a
bearish outside bar formation would generally occur after an uptrend.

The general psychology behind the bullish outside bar formation is that the
current downtrend is beginning to wane, and sentiment is starting to shift
from bearish to bullish. Similarly, within the bearish outside bar formation,
the uptrend is beginning to wane, and the sentiment is starting to shift from
bullish to bearish.

Below you will nd an illustration of a bullish outside bar formation.

Looking at the structure above for the bullish outside bar pattern, we can
see that the following conditions exist. For starters, the second bar opened
below the previous close. The second bar also has a low that is lower than
the previous bar. And nally, the second bar closes above the open of the
previous bar. Thus it is a bullish bar reversal. When these conditions are met,
we can classify the two bar structure as a bullish outside bar pattern.

The bearish outside bar pattern would work the same but in reverse. That is
to say that the second bar within the bearish outside bar pattern will open
above the previous close, and it will also have a high that is higher than the
previous bar. And nally, the second bar will close below the open of the
previous bar. Thus it is a bearish bar reversal.

Since the outside bar formation is a reversal pattern, the implications is for
price to reverse the current trend. What the outside bar does not provide us
with is the extent of the price move that we should expect following the
completion of the pattern. Traders will need to utilize other technical tools to
nd appropriate target points when trading the outside bar pattern.
Two Bar Reversal Pattern

A 2 bar reversal pattern is a commonly seen structure within the nancial

markets. Within the bullish two bar reversal pattern, the initial bar is a
relatively strong bearish bar, and the second bar is a relatively strong bullish
bar.

The implication is that the initial bearish sentiment seen within the rst bar
has been reversed by the opposite, now bullish sentiment within the
second bar.

Within the bearish two bar reversal pattern, the initial bar is a relatively
strong bullish bar, and the second bar is a relatively strong bearish bar.

The implication here is that the initial bullish sentiment seen within the rst
bar has been reversed by the opposite now bearish sentiment within the
second bar. Below you can see an illustration of a bullish two bar reversal
pattern.
Notice how the rst bar displays strong bearish characteristics, as the open is
near the top of the range, and the close is near the bottom of the range.
Then the second bar opens near the bottom of the range, and closes near
the top of the range. Two bar reversals are often seen following a corrective
phase within a larger impulse structure. In other words, they are often seen
at the end of a pullback within the context of a trending market.

And so, it’s common to see a bullish two bar reversal form at the end of a
downward corrective phase, within a larger uptrend. Similarly, it’s common to
see a bearish two bar reversal form at the end of an upward corrective phase,
within a larger downtrend. When this scenario occurs, it would be best to
treat the two bar reversal structure as a possible terminal point within a
minor retracement, and prepare to position in the direction of the larger
trend.

Three Bar Reversal

The three bar reversal pattern is similar to the outside bar pattern in that it
often occurs after an extended market move. However, the three bar
reversal is composed of three bars while the outside bar pattern consists of
only two bars. The 3 bar reversal pattern can be bullish or bearish.

A bullish three bar reversal pattern starts off with a strong down bar, which is
then followed by a relatively narrow bar. This narrow middle bar closes below
the opening of the rst bar. Additionally the middle bar will be the lowest bar
within the three bar structure. The last bar will be a strong up bar and close
above the high of both the rst and second bars. Within the candlestick
terminology, the bullish three bar reversal is classi ed as the Morning Star
pattern.

A bearish three bar reversal pattern starts off with a strong up bar, which is
followed by a relatively narrow middle bar. The shorter middle bar will close
above the opening of the rst bar.

Moreover, the middle bar will be the highest bar within the three bar
formation. Finally, the last bar will be a strong down bar that closes below the
low of both the rst and second bars. Candlestick traders will recognize the
bearish three bar reversal pattern as the Evening Star pattern.

Below you will nd an illustration of the bullish three bar reversal pattern.
Generally, the bullish three bar reversal pattern will occur at the end of a
relatively prolonged downtrend phase. The bullish three bar reversal can
either lead to a minor upward price retracement, or a new uptrend
altogether. Similarly the bearish three bar reversal pattern will occur at the
end of a relatively sustained uptrend phase. The bearish three bar reversal
can either lead to a minor downward price correction, or a new down
trending market phase.

Key Reversal Bar Pattern

The key reversal bar formation is a two bar structure that can signal an
impending trend change. The bullish variety of the key reversal bar will open
below the low of the previous bar and trade higher and close above the
previous bar’s high. The bearish variety of the key reversal bar will open
above the previous bar and trade lower to close below the previous bars low.
In the illustration below, you can see an example of a bullish key reversal bar
pattern.
The best way to trade the key reversal bar pattern is to wait for a break above
the high of the second bar, in the case of the bullish variety, and to wait for a
break below the low of the second bar, in the case of a bearish variety.

The key reversal bar pattern is especially signi cant when it occurs at or near
a xed or dynamic support or resistance level. For example, a bullish key
reversal pattern that occurs at a horizontal support level is considered quite
signi cant. Additionally a bearish key reversal pattern that occurs at the 50
day moving average line would also be considered a signi cant signal.

These are just a few examples of how to combine the key reversal bar
pattern with other technical studies, and there are many other ways to apply
con uence using the key reversal bar, and other bar formations.

Exhaustion Bar Pattern

The exhaustion bar pattern occurs less frequently in the market compared
to most of the other patterns that we’ve described earlier. Nevertheless, it is
a very important reversal pattern that traders should keep an eye out for.
The exhaustion bar pattern typically occurs at the end of a prolonged trend
phase, either to the upside or to the downside. A bullish exhaustion bar
opens with a gap down move, which is then followed by strong upward
movement on high-volume. The price closes at or near the top of the range.
A bearish exhaustion bar opens with a gap up move, which is then followed
by strong downward price movement on high-volume. The price closes at or
near the bottom of the range. Within both scenarios, the gap created
between the rst and second bar remains un lled upon the completion of
the second bar.

Below you can see an illustration of a bullish exhaustion bar pattern.

Typically what’s going on behind the scenes within an exhaustion bar

formation is that the market is trying to make a nal attempt to push prices
in the direction of the current trend. But that attempt eventually fails, and
leads to a sharp reversal.

The best way to trade an exhaustion bar is to wait for a break above the high
of the second bar to go long in the case of a bullish exhaustion bar. And you
would wait for a break below the low of the second bar to go short in the
case of a bearish exhaustion bar.
It’s also worth noting that the closing price prior to the opening gap will
often act as an area of resistance in the case of a bullish exhaustion bar, and
can act as an area of support in the case of a bearish exhaustion bar. As such,
traders should watch the price action closely near this area or consider
exiting a portion of the trade near this level.

Island Reversal Pattern

The island reversal pattern is also a relatively rare bar pattern, not often seen
on the price chart. It is characterized by having a gap on either side of a bar
or set of bars. As with the exhaustion bar pattern, it occurs after a prolonged
price move that has often gone too far too fast. Typically we will see that
there is increased volume on the initial gap and the secondary gap.

An island reversal that occurs near the top of a trend move is often referred
to as an island top. The island top has a bearish implication. An island reversal
that occurs near the bottom of a trend move is often referred to as an island
bottom. The island bottom has a bullish implication.

Below you can see an illustration of a bullish island reversal pattern.

Island reversal patterns are known to trap traders on both sides of the
market. The volatility is often relatively high during this time. Additionally,
these patterns often occur on some unexpected news announcements or
on a highly anticipated earnings report within the stock market. Traders
need to be nimble when trading the island reversal pattern and maintain
strict money management procedures to avoid getting whipsawed. In any
case, the island reversal pattern is a high probability trade set up that should
be on your radar.

Summary

Bar charts are a traditional charting style that has historically been more
popular with Western traders. Over the years, candlestick charts have
become more popular both among Western and Eastern traders. Both types
of charting styles can be useful in analyzing price action, particularly as it
relates to looking at speci c patterns that form within two or three adjacent
bars or candles. In that way, trading bar chart patterns can be very similar to
trading candlestick chart patterns.

We have presented seven of the most important and noteworthy bar

patterns. It would serve a trader well to memorize these formations so that
they can quickly isolate them on the price chart, when they occur.

Reading a Forex Chart with Candlesticks

Learning to read candlestick charts is a great starting point for any technical
trader who wants to gain a deeper understanding of how to read forex
charts in general. As you may already know, Candlestick charts were
invented and developed in the 18th century. The earliest reference to a
Candlestick chart being used in nancial markets was found in Sakata,
Japan, where a rice merchant named Munehisa Homma used something
similar to a modern Candlestick patterns to trade in the Ojima rice market in
the Osaka region.

Although bar charts and line charts were quite popular among Western
traders, Japanese Candlestick charts and additional patterns were
introduced to the Western nancial markets in the early 1990’s, by a
Chartered Market Technician (CMT) named Steve Nison. The popularity of
Candlestick charts has soared among Western market analysts over the last
few decades because of its highly accurate predictive features. Candlestick
charts can play a crucial role in better understanding price action and order
ow in the nancial markets.
Before you can read a Candlestick chart, you must understand the basic
structure of a single candle. Each Candlestick accounts for a speci ed time
period; it could be 1 minute, 60 minute, Daily, Weekly exc. Regardless of the
time period, a Candlestick represents four distinct values on a chart.

. The opening price at the beginning of the time period

. The closing price at the end of the time period
. The highest price during the time period
. The lowest price during the time period

As you can see in gure 1, when you read a candle, depending on the
opening and closing prices, it will provide you information on whether the
session ended bullish or bearish. When the closing price is higher than the
opening price, it is called a Bullish Candlestick. By contrast, when the closing
price is lower than the opening price, it is known as a Bearish Candlestick.
And the upper and lower shadows of the Candlestick represent the highest
and lowest price during the time period.

Pros and Cons of Using Candlestick Charts Compared

to Line and Bar Charts

Compared to Western line charts, both Bar and Candlestick charts offer
more data to analyze.
Although the same four values are also found in Western-style bar charts,
the bar chart uses horizontal lines on the sides of a vertical line to project the
opening and closing prices. But, a series of Candlesticks on a chart can help
traders identify the character of price action more de nitively, which helps in
the decision-making process.

With Candlesticks, it is much easier to interpret the price action during the
time period because a Bullish Candlestick shows a full body with a pre
designated color and a Bearish Candlestick a full body with a different pre
designated color. As a result, many professional traders have moved to using
Candlestick charts over bar charts because they recognize the simple and
effective visual appeal of candlesticks.

However, while Candlestick charts make it much easier to interpret price

action, it lacks the smoothness of the line chart, especially, when the market
opens with a large gap. Hence, professional traders often end up using a
short time period moving average to get the “feel” of a smooth trend, or lack
of trend, in the market. So, it can be a good idea to add a moving average to
the chart while using Candlestick charts.

Different Types of Candlestick Patterns Convey Different

Messages

Each Candlestick represents an Open, High, Low, and Close value. The
location of the opening price, how high or low price reached during the
candle session, and where the price closed at the end of the time period are
all factors in understanding candlestick charts.

Over the years, Japanese traders had developed various Candlestick

patterns based on historical price movements. Every trader should invest
their time and learn these patterns as it will provide a deeper knowledge
and understanding of reading forex charts in general. Candlestick patterns
can help you interpret the price action of a market and make forecasts
about the immediate directional movements of the asset price.

While there many different patterns, we will discuss some of the most
popular Candlestick patterns that can help in reading a price chart like a
professional trader.

A candlestick reading can provide us with information on the three market

sentiments: bullishness, bearishness, and a neutral or tentative market
condition.
Below are some candle formations that can help us gauge market
sentiment:

Figure 2: Various Types of Simple Candlestick Formations

Referring to the above illustration, A bullish Candlestick like the Big White
Candle indicates bullish trend continuation, while a bearish Candlestick like
the Big Black Candle indicates bearish trend continuation. On the other
hand, a Doji Candlestick represents a neutral or tentative market condition.

So when you are reading candlestick charts, you need to keep in mind
which Candlestick patterns indicate additional bullishness and which ones
indicate further bearishness, as well as which ones indicate a rather neutral
market condition and act accordingly.
The list of simple Bullish Candlestick Patterns include Big White Candle,
Hammer, Inverted Hammer, and so forth. By contrast, the list of simple
Bearish Candlestick Patterns includes Big Black Candle, Gravestone Doji,
Hanging Man, Inverted Black Hammer, etc.
If you are chart reading and nd a bullish candlestick, you may consider
placing a buy order. On the other hand, if you nd a bearish candlestick, you
may choose to place a sell order. However, while reading Candlesticks if you
nd a tentative pattern like the Doji, it might be a good idea to take a step
back or look for opportunities elsewhere.
When you are reading a Candlestick price chart, one of the most important
things to consider is the location of the Candlestick formation. For example,
a Gravestone Doji appearing at the top of an uptrend can indicate a trend
reversal. However, if the same pattern appeared during a longstanding
downtrend, it may not necessarily mean bearish trend continuation.
We will further discuss the importance of location of Candlestick patterns in
some example trades later.
In the next section we will discuss some complex candlestick patterns. Let’s
take a look at the illustration below:
Figure 3: Examples of Some of the More Complex Candlestick Patterns
Once you have mastered the identi cation of simple Candlestick patterns,
you can move on to trading more complex Candlestick patterns like the
Bullish and Bearish 3-Method Formations.
The main difference between simple and complex Candlestick patterns is
the number of Candlesticks required to form the patterns. While a simple
Candlestick pattern, like the Hammer, requires a single Candlestick, the
more complex Candlestick patterns usually require two or more
Candlesticks to form.
For example, the Bullish Harami requires two Candlesticks, the Three White
Soldiers pattern requires three Candlesticks, and the Bullish 3 Method
formation requires 4 candles.
Once again, remember that regardless of the complexity, the location of all
these simple and complex Candlestick patterns is one the most vital
aspects of reading forex charts while using Candlesticks.

Candlestick Chart Reading Like a Pro

By now, you should have a good idea about what a Candlestick is and how to
read simple and complex Candlestick patterns. So, let us now try to read
trading charts to see how we can trade using these patterns.

Figure 4: Forex Chart Reading Using a Simple Engul ng Bullish Candlestick

Pattern
In this example in gure 4 of the GBPJPY daily chart, we can see that the
GBPJPY price was bouncing around a strong support level but failed to break
below it. On the third try, the GBPJPY did penetrate the support level, but
the market swiftly reversed and formed an Engul ng Bullish Candlestick
pattern that signaled further bullishness in the market.
At this point, some beginner traders may recognize the bullish setup and
immediately enter a buy order. However, professional traders are not only
waiting for Candlestick patterns to form around key pivot zones, like this
support level in gure 4, but they will also wait for the proper con rmation to
enter the trade.

The next day, the GBPJPY price penetrated above the high of this Engul ng
Bullish Candlestick, which con rmed that there would be additional
bullishness in the market over the next few days.

Professional traders wait for this con rmation because they understand the
concept of order ow and self-ful lling prophecy.

You see, most large banks and hedge funds also watch key market levels
and price action around critical levels. Once the Engul ng Bullish
Candlestick formed around this crucial support level, it prompted a
signi cant number of pending buy orders just above the high of this
Engul ng Bullish Candlestick. Once the price penetrated above the high, it
triggered those orders, which added the additional bullish momentum in
the market.

Hence, waiting for the price to penetrate above the Candlestick pattern can
help you increase the odds of winning on the trade.

As you can see in gure 4, once the buy order con rmation came, it did
trigger a large uptrend move over the next few days.

As we brie y discussed earlier, the location of the Engul ng Bullish

Candlestick for this particular trade was the most important factor. First, it
formed around a major pivot zone, where the GBPJPY Bears had failed to
break the support area in the previous two attempts.

When you apply Candlestick patterns with additional technical con uence,
it provides for a powerful combination of factors that can help increase your
odds of winning. And this is exactly what professional traders try to do.

If the same Engul ng Bullish Candlestick pattern appeared at the top of a

longstanding uptrend, it would have also signaled additional bullishness in
the market, but that signal would be much less powerful. Since the market
was already in an uptrend, it may not have had the legs to push the price
much higher.
However, on this instance, the market was already trading in a range for
several days. As you may know, when the market consolidates for a while, it is
basically setting up to breakout in one direction or the other. The formation
of this bullish Candlestick pattern provided a signal as to of which way the
market was about to break.

If you knew how to read a simple Candlestick pattern like the Engul ng
Bullish pattern, you could have entered this trade at the right time and
earned a handsome pro t with this high reward to risk ratio setup.

Figure 5: Three White Soldiers Candlestick Trend Reversal Pattern

In gure 5, we can see two different Candlestick patterns triggering two
different trades. On the rst occasion, the Engul ng Bearish Candlestick
pattern appears during a downtrend that provides traders with a trend
continuation signal. On the second occasion, a Three White Soldiers
Candlestick pattern emerges at the bottom of the downtrend, which
triggers a new bullish trend.

In the rst trade, the AUDUSD was already moving to the downside. Once
the Engul ng Bearish Candlestick broke below the support level, it opened
up the possibility of a trend continuation. The next day, AUDUSD price
penetrated below the low of the Engul ng Bearish Candlestick and
con rmed the trade, which triggers the sell order.
It is strongly recommended that beginning traders stick to using Engul ng
Bearish or Bullish patterns to con rm a trend reversal, as those tend to be
higher probability trades. However, this particular example in gure 5
demonstrates that if you know how to use the con uence of support and
resistance levels along with Candlestick patterns, these can be used to
trigger trend continuation signals as well.

In the second trade, the Three White Soldiers Candlestick pattern emerged
near the bottom of this downtrend. At this point, professional traders for
preparing for the market to reverse the prevailing downtrend. The prudent
course of action would be to wait for the market to con rm this signal, which
means that unless the price broke above the high of this Three White
Soldiers Candlestick pattern, you would not have entered the trade.

Combining Technical Analysis Indicators with

Candlestick Patterns

Candlestick chart reading is largely based on the principle of technical

analysis, which assumes that regardless of the underlying fundamental or
economic conditions, the current market price re ects “all known
information” regarding the asset.

Hence, the reason why an asset is moving in a certain direction is often not
necessarily important to technical traders. Instead, they are more interested
in interpreting what the price action is doing at the current moment and
how they can take advantage of that. Furthermore, technicians know that
the underlying reasons for market uctuations over time can be many, and
often the market does not always act “rational.”

Candlestick chart reading can be most useful during these volatile periods of
irrational market behavior.

Traders can apply overbought and oversold technical indicators like

Stochastics or Relative Strength Index (RSI) to nd out when such irrational
market conditions may be present.

For example, by using oscillating technical indicators, a trader will rst wait
for a signal that the market has moved into an overbought or oversold
condition. At that point, they would look for a reversal signal of the prevailing
trend. Many times, this reversal signal will come in the form of a candlestick
formation.
Formation of a simple or complex Candlestick pattern during such market
condition con rms and veri es the impending contrarian price action for the
trader. Placing their order in the market using this combination of technical
factors can signi cantly improve the accuracy of their trades.

Once you learn how to correctly read Candlestick patterns and combine this
skill as part of a broader trading strategy, then you will likely improve the
consistency of your market entries and your overall performance as a trader.

Conclusion

By now, you should be able to see the value of investing your time to learn
how to read a Candlestick chart, and how to interpret the various simple and
complex Candlestick patterns that we discussed. So before you start trading
with Candlestick patterns, it is important to understand why and how these
patterns work.

Once you master the basics of Candlestick chart reading, it can help you
integrate this unique knowledge into your existing trading strategy and lead
to better accuracy and improve your trading performance in the long run.

What is Price Action Trading?

If you are sick of charts overloaded with indicators then the following
material will help you to view the markets in a simpler, more effective way.
Although traders tend to use different tools when trading forex, I will walk
you through the most classic way of trading. It is a price action trading
system. Today we will go through the most important aspects of a price
action trade and we will examine a few price action trading strategies.

Price action trading in forex is a trading method based solely on analyzing

previous price behaviors. This means that a trader analyzes market
conditions on a naked chart without using additional indicators or
oscillators. It is the purest way to evaluate the market, and certainly the
most effective way to trade that I have found. Price Action trading helps us
with the following:

Trend Identification

The most important process in a price action trading strategy is in identifying

ongoing trends.
You probably have heard the famous phrase “The trend is your friend”. And
this is absolutely correct. The trend is really your friend. You should always try
to trade in accordance with the prevailing trend whenever possible.

Avoiding Consolidations

Price consolidation is when the price is ranging without any clear direction.
This means that the price of the forex pair is not increasing or decreasing. It
is rather moving sideways, and usually not providing any high probability
trading opportunities.

For most traders, a good trading rule would be to stay out of the market
when the price is consolidating in order to avoid whipsaws.

Finding Reversals

Some traders tend to attack currency pairs when trend lines are getting
exhausted. The reason for this is that trend reversals give you the
opportunity to be in the market right at the beginning of a trend. When
looking for reversals, traders try to enter before the crowd does, in order to
maximize the potential reward to risk ratio offered on such trades.

Analyzing Corrections

A trend correction occurs when the price is moving in a direction opposite to

the prevailing trend. Typically a correction or retracement will bounce off the
sloping trendline, which can con rm the resumption of the trend.
Corrections usually move the currency pairs with an amount lower than the
regular trend movement. At the same time, corrections typically take
approximately the same time to form as a regular trend movement. In other
words, if you are trading a correction, your position will take the same time as
a regular trend movement. This is based on harmonic relationships within
the market.

Some traders feel that corrective trend movements should be avoided

because the actual trend movement provides signi cantly better
opportunity. On the other hand, there are traders who prefer counter trend
trading. If you can master market timing, you will nd trading corrections can
be quite pro table as well. But in general, I believe you should not try to
trade corrections if you are not yet an experienced trader.

Popular tools when trading price action

Although indicators are not typically used in the framework of a price action
trading strategy, price action traders do rely on various chart patterns. I am
going to introduce you to some of the most popular chart patterns found in
the markets. But before we dive into various chart patterns, lets brie y
discuss the concept of Support and Resistance levels.

Support and Resistance

Support and resistance are on-chart levels, where the price is expected to
react. These are usually psychological levels where investors’ attitude tend to
match. These levels are easily spotted on the chart. When you see the price
attempting to pass thru a certain level several times but is met with buying
or selling pressure, then you have a psychological level. If the price
approaches this level in bullish direction, the level is a resistance.

And at the other end of the spectrum, if the price approaches the level in
bearish direction, it is a support. Note that every support can be broken and
then turned into a resistance. The same is in force for the resistance itself. It
could always be broken and turned into a support. Traders use support and
resistance levels to set entry and exit points on their trading position when
trading with price action.

This is the daily chart of the USD/JPY for Mar 1 – May 19, 2015, showing the
price of the Yen consolidating between a support and resistance area.

Every forex trading strategy can bene t from proper support and resistance
identi cation. Most forex traders, whether novice or experienced will look at
support and resistance levels before initiating a trade.

Trendlines
Trend lines act the same way as a horizontal support or resistance lines. The
difference is that a trend line is inclined. In order to con rm a trend, we need
to connect at least two tops or bottoms on the chart with a single line.

The continuation of this line is the trend’s potential. Every next price
movement toward this trend line has a high chance to bounce from this
established trendline. Traders can use trendlines to enter into the market
whenever the price bounces off of it or use it to get out of an existing
position when price nears the trendline.

This is a H1 chart of the USD/CHF for Dec 8-10, 2015 showing a bearish trend.
The blue points show the moment where the trend line is being tested. As
you see, this is a 10-times tested bearish tendency, which is considered
reliable.

Channels
Price channels act the same way as a trend line. The difference, though, is
that channels have another level, which forms a corridor with the trend.
When we con rm a channel on the chart, we expect the price to bounce as
a ping pong ball from the upper and the lower level of the channel. This
gives the price action trader a clear view of when the price will change
direction and for how long it will go in this direction. Also, the more
experienced traders can use channels to trade trend corrections in addition
to the actual trend movement.
This is the H4 chart of the USD/JPY for May 8-23, 2015, showing the
movement of the Yen in a bearish channel. The upper level is tested 6 times
and the lower level is tested 4 times. At the same time, the bullish break
through the upper level of the channel provides a new bullish opportunity.

Candlestick Patterns

The use of candle patterns is a very common technique for price action
traders. Candlestick patterns are speci c candle formations on the charts,
which can foretell different price potential. Let’s take a look at some of the
most common candle patterns.

Doji

The Doji candle is fairly easy to recognize on the chart. We have a Doji on the
chart when the price opens a candle at a certain level and then closes that
candle at the same level. Thus, the Doji looks like a dash with a wick. The Doji
candle indicates indecision in the market, and many times it give us clues of
an exhaustion point after a trend. Have a look at the image below:
This is the M30 chart of USD/JPY for Dec 14-15, 2015. We have an uptrend, a
Doji and a reversal afterwards. Going short after the Doji puts us in a
pro table short position during a decrease of about 50 pips.

Hammer and Hanging Man

These two candles look absolutely the same. They have a long bearish wick
and a head. The difference between these two candles, though, is that the
Hammer is at the end of a bearish trend indicating a potential reversal, while
the Hanging Man is usually found at the end of a bullish trend, signaling an
upcoming reversal. The picture below shows a bearish candle followed by a
hammer and a rapid price increase:

This is the H4 chart of EUR/USD for Jul 3-13, 2015, showing how a Hammer
Candle preceded a price increase of about 265 pips in less than 3 days. Pretty
attractive, don’t you think?

Inverted Hammer and Shooting Star

The Inverted Hammer and the Shooting Star look absolutely the same too.
Furthermore, they are the exact mirror image of the Hammer and the
Hanging man. They have a lower body and a long bullish candle wick.

The Inverted Hammer has the same function as the Hammer. When you get
it at the end of a bearish trend, you expect the price to increase. At the same
time, if you get a Shooting Star at the end of a bullish trend, you will likely
see a decrease of the price. Refer to the image below to see how this works:
This is the H1 chart of USD/CHF for Nov 18-20, 2015. After an increase of the
Swissy a bearish Shooting Star appears on the chart. The next thing we see is
a sharp decline of about 67 pips for 8 hours. Note that in order to discover
candlestick patterns on your chart, you should actually use a Japanese
candlestick chart con guration. If you are using a line chart or bar chart you
will simply have no candles to analyze.

Chart Patterns

Chart patterns are speci c formations and gures on the chart which give
clues to potential trend continuations and reversals. One of the unique
features of chart patterns, is that by analyzing the pattern itself, we are able
to set potential targets for the trade. In many cases, chart patterns have the
potential to move a forex pair with an amount equal to the size of the
formation. This is typically referred to as a measured move. Depending on
the chart pattern, and how it is traded, it is not uncommon to see success
rates of the chart patterns above 60% – 65%. Now I am going to discuss some
of the most reliable chart patterns:

Double Top and Double Bottom

The double top and the double bottom are reversal chart patterns, where at
the end of a trend, the price creates two tops (or bottoms) approximately on
the same level. The bottom between the two tops is the signal level. When
the price breaks through the signal level, we consider the formation as
con rmed and we open a position accordingly. Then we follow the market
until we reach a target equal to the size of the formation. Take a look at the
image below:
This is the M30 chart of the USD/CHF for Dec 14-15, 2015. The blue lines show
the double top formation. The orange horizontal line is the signal line, which
triggers our short position. The black lines show the size of the formation,
which is the amount of decrease we pursue. Notice that the signal line plays
the role of a support since the price conforms to that level a bit before the
creation of the double top. Also, when the price breaks the signal line as a
support, it tests it immediately as a resistance afterwards. This gives
additional reliability to our short position.

The double bottom formation looks the same, but upside down. It could
appear at the end of a bearish trend and could reverse the price movement
the same way as the double top. Thus, it should be traded the exact same
way as a double top formation, but in the opposite direction.

Head and Shoulders and Inverted Head and Shoulders

The head and shoulders is a reversal chart pattern, and is one of the most
reliable chart patterns to trade. We have a head and shoulders formation
when the price creates three spikes in this order – one lower, one higher and
another lower on the approximate same level as the rst one. Traders call
this formation head and shoulders because, you guessed it, it really looks like
a head and shoulders. Head and shoulders typically appear at the end of a
bullish trend. At the same time, inverted head and shoulders typically
appear at the end of a bearish trend. The two formations look the same, but
inverted – the same way as with the double top and the double bottom
formations.

When you get a head and shoulders formation, you should set up your
signal line, which is also called the neck line. The neck line is the straight line,
which connects the two bottoms creating the head between the two
shoulders. When the price breaks the neck line, you would open a position,
and target a price movement equal to the size of the formation. Please refer
to the following example for a head and shoulders example:
This is the H4 chart of the Cable (GBP/USD). The blue lines on the chart draw
a head and shoulders formation. The orange line is the signal line of the
formation – the neck line. The black lines represent the size of the formation
and at the same time, the potential target we are pursuing. We go short
whenever the price breaks the neck line and we aim for the target level.

The inverted head and shoulder formation works the same way, but could
appear at the end of a bearish trend, reversing it into a bullish direction.

Rising Wedge and Falling Wedge

We have a rising wedge when the price is closing with higher tops and even
higher bottoms. And we have a falling wedge when the price closes with
lower bottoms and even lower tops. The rising wedge has the same
potential as the falling wedge, but in the opposite direction. Also the two
formations are a mirror image to each other. The rising and the falling wedge
can be trend reversals or trend con rmations depending on where they
appear in relation to the overall trend.

When you have a rising wedge in a bullish trend, this typically suggests that
price might reverse its direction. At the same time, if you spot a rising wedge
during a downtrend, it has a trend con rmation character.

If you see a falling wedge on a bearish trend, this means the trend could
reverse its direction. At the same time, if you notice a falling wedge during a
bullish trend, then the formation has a trend con rmation character.

If this sounds confusing to you, just remember that the rising wedge
typically calls for an upcoming bearish movement, while the falling wedge
indicates eventual price increase.
Similar to the other chart patterns we discussed, the wedge has the
potential to push the price toward a movement equal to the size of the
wedge. The image below will show you how to trade a wedge.

This is the H4 chart of the AUD/USD forex pair where we have a falling wedge
reversal pattern after a price decrease. Since it is after a decrease, we know
that the price might increase after the wedge. Thus, we buy after the price
breaks the wedge in a bullish direction. Note that in a wedge, the signal line
is the level, where the price is expected to break through.

Now imagine that we get this wedge after a price increase. In this case, the
same falling wedge will act as a trend continuation pattern.

The same strategy applies for rising wedges. If a rising wedge is formed after
a price increase, then we have a reversal pattern and we expect to see a
price drop. If a rising wedge occurs after a price decrease, then the wedge
acts as a correction and the expected drop has a continuation character.

The trading patterns we discussed above are fractal in nature, which means
that they could appear on any timeframe on any chart. As with any type of
analysis, you should always be prepared for different trading situations. Also,
some of the patterns could appear at the same time. You can always con rm
a trend with a continuation chart pattern and an additional candle pattern,
which can give you additional con rmation when entering the market.

I believe now you should have a clearer picture of how to trade price action
using different trading patterns. Price Action Trading is the purest, simplest
way to trade the markets. We base our trading assumptions solely on the
recent price movement and we try to predict where the price might go
based on its previous behavior.
In Conclusion

Price Action Trading is a method of trading, which puts an emphasis on

price movement and behaviors rather than on trading indicators.
A few of the most important processes in price action trading are:
Identifying Trends
Spotting Reversals
Analyzing Corrections
The most important trading tools for price action trading are:
Support and Resistance
Trend Lines
Channels
Candlestick Formations
Chart Patterns
Price action trading patterns could appear at any time and could be
combined with Candlestick patterns for extra reliability.

What are Forex Trendlines

Many traders are familiar with trading price action techniques using
horizontal support and resistance lines, but some traders nd it dif cult to
trade using trend lines, and this is rightfully so, since trendline analysis
requires a little more discretion on the part of the trader. Trendlines are very
useful in helping you determine the trend, and also the strength of that
trend as well. Today we are going to take a closer look at this important price
action analysis technique.

Trendline analysis in Forex is a crucial price action method that helps us rst
and foremost in trend detection. Trendlines measure the price move of a
Forex pair when the price is increasing or decreasing. In this manner, there
are two types of trendlines:

1) Bullish Trendlines

We have a bullish trend when the Forex pair is increasing. In this manner,
the price of the pair records higher bottoms and higher tops.

The bullish trend line should be located below the price action and it should
connect the bottoms of the currency pair. This way the bullish trend line acts
as a support for the price action.

2) Bearish Trendlines
The bearish trend has the opposite character of the bullish trend. We use a
bearish trendline in order to measure the price action during a price
decrease.

In this manner, the bearish trend requires the price to record lower tops and
lower bottoms. This indicates that the price is dropping. The bearish trend
line should be located above the price action during a price decrease. The
bearish trendline plays the role of resistance for the price.

How to Draw a Trendline

In order to draw a trendline (bearish or bullish), you rst need to identify a

trend. So, let’s have a look at a chart.

This is the daily chart of the USD/CAD Forex pair. Can you nd a trend on the
chart? It’s hard to do so visually without the help of a trendline. But once we
add our trendline to the chart, you can see that there are at least three
minor trends here. Let’s look below.
This is the same USD/CAD chart, but this time, we have added three
trendlines. Two of them are bearish (red), and one of them is bullish (green).
Basically, drawing trendlines is not hard, but it can be tricky at times. So let’s
get into the details of building trendlines.

In order to gain a better understanding of how to draw trend lines, we must

rst recognize the composition of the typical candlestick bar. Every
Japanese candlestick consists of ve elements – body, top of the body,
bottom of the body, upper candlewick, and lower candlewick. We need to
understand these elements in order to build a proper trendline. So, if you
want to build a bullish trendline, you need the spot the lower candlewicks
and the candle body bottoms on the chart. Most times you would use the
candlewicks to compose the trendline, however, you could use the candle
body in instances where short term volatility spikes occur outside the
normal range of the sloping trendline. Then, if the price is moving upwards,
you connect these with a straight line.

Three Important Rules for Building Trendlines

In order to con rm a trend, you need at least three points lying on the same
line!

When drawing trendlines, you must have a minimum of two points. In order
to con rm a sloping support or resistance tendency, you need a third
con rmation point, lying on the same line as the two previous points. Let me
show you this on our USD/CAD chart:
So, our bullish trend starts with the rst and a second bottom. The third
bottom is the trend con rmation signal. The arrows after the con rmation
point out subsequent tests of support, which lay in the area of our trendline.

Never think of the trend as contained within of a single line. The trend is not
a line, but an area.

When you build a bullish trendline you should take into consideration the
lower candlewicks and the body bottoms. Very often the lower wicks of the
candlesticks might go outside the scope of the trendline. However, we know
to think of the trendline as an area and not as a single line written in stone.
In this manner, if the price action breaks the trendline with its candlewick,
this doesn’t mean that the trend is broken. An important point also to keep
in mind is that as trendlines mature, there will be more of a tendency for
price reactions at the trendline levels, and many times you will see false
breakouts around these areas
This is another example on the USD/CAD Forex pair. On the image we see a
big bearish trend line on the daily USD/CAD chart. The third top on the chart
con rms the trend line. The last top of the downtrend goes outside the
trendline.

However, we recognize from the price action at this test that most of the
price action closed within the trendline area, and there were quite a few
wicks around this zone, indicating that price was being rejected as it was
trying to break thru. As a result, price records another drop before it
eventually breaks the trend on the nal attempt.

When drawing trend lines, it’s always best to do it manually by hand rather
than relying on a trendline indicator to plot the line for you. There are auto
trendline indicators that will draw trendlines for you, but most are not very
reliable.

Trading Trendlines

Since we discussed how to identify trends and build trendlines, we can now
switch gears and discuss trading with trendlines. So let’s now talk about
incorporating a trendline trading strategy.

We’ll start with a few basic rules for trading with trendlines. There are three
basic occurrences on the trendline, which could be traded – trending move,
correction, and breakout. We will now go through each of these.

Trading the Trending Move

When we con rm a trendline, we can prepare to trade with the trending

move. With the trendline con rmation we have a clear area for our position
entry point. In this manner, if we con rm a bullish trend, we can trade the
next bounce from that trendline, assuming that price action con rms our
setup. Have a look at the image below:
This is the 240 minute chart of the AUD/USD Forex Pair for May – June, 2015.
The blue line is a trend line of the bearish price move you see. The three
arrows are the three base points, which form the trend. Notice that the third
arrow is green. This is so, because it indicates an area of trend con rmation.
You could go short the AUD/USD after the green entry arrow marked on the
chart. We see a strong bearish candle after price approaches the trendline.
This provided a good entry signal.

After the trend gets con rmed (green arrow) the AUD/USD Forex pair
creates a trending move downwards. Then we see a new lower bottom and
a new correction to the trend. The price interacts with the blue trendline
and then bounces downwards again. AUD/USD breaks its previous low,
creating a lower bottom.

The next move to the trendline is considered the last one, although there is
a tiny 1-period bounce from it. The AUD/USD price breaks the trend
afterwards with a strong bullish closing candle. This is a signal that the trend
may be over or very likely to stall. In this case the AUD/USD short sellers
might want to close their successful trades.

Trading Corrections of Trendlines

Now I will show you how to spot and trade corrections of trending moves.
However, I would like to emphasize that counter trend trading is for
advanced traders. The reason for this is that it is a risky initiative to trade
corrections. But rst…

What is a Trend Correction in Forex?

A correction (corrective move) is a move, which comes after an impulsive
trending leg and brings the price back to the trendline area. A corrective
move should be smaller than the trending move. Also, in most cases,
corrections tend to take more time to complete than the trending leg
phase. As a result, corrections are de nitely riskier and less attractive to
trade. In order to demonstrate how to trade corrections in the content of
trendlines, we will use a channel for our example. Have a look at the image
below:

This is the weekly chart of the GBP/USD. Take note of the two bullish parallel
trendlines (blue). The black circles with the numbers show you the
respective Trend phases. The green arrows show you the trending moves in
the channel, while the red lines point out the corrective moves.

When we have a channel, we usually con rm the pattern with the third
price move. In other words, we need only two bottoms in case of a bullish
trend and not three as described above. The reason for this is that after the
third price move we have two bottoms on a bullish line and two tops on
another bullish line, which is parallel to the rst line. In this manner the
pattern gets con rmed.

The rst move which could be traded is at #4. You would have connected
points one and three on the chart to draw the upper line, then you would
draw a parallel line from the bottom of point 2 and extend it out. This is
referred to as a parallel trendline and is a popular technique that many
traders are not aware of. Most traders would use the con rmation that
comes at the point 5 retest as a potential trade setup. .
Notice that the corrections are smaller in terms of price change, as they are
contrary to the general trend. A countertrend trader would sell at the tops of
the upper trendline with targets near the bottom of the channel. As you can
see this strategy is much less desirable than the potential that we have in
trading with the trend to the upside.

Trading Trendline Breaks and Reversals

Since we have learned how to trade swings using trending and counter
trend approaches, I will now show you how to trade trendline breakouts. For
example, If the price is moving along in a directional manner and it
demonstrates the tendency of higher highs and high lows we have a bullish
trending situation. But as we know, this pattern is likely to stop and reverse
at some point. When this happens, the price changes its direction and starts
moving in the opposite direction.

Traders should be on the lookout for potential trendline breaks, as this is an

attractive way to get in the beginning of a new price move. However, every
breach in price through the trendline is not enough to con rm a reversal
pattern. As I already said, it is common for the price to go a bit beyond the
scope of the trendline, and the trendline should never be treated as an exact
line. Essentially, trendline support and resistance should be viewed as a zone
rather than as an impenetrable line.

Experienced traders know well that con rming a reversal is not an exact
science. I have divided the process into four phases to understand the
typical structure of a trendline breakout. The image below will show you the
four phases to recognize when trying to con rm a trend reversal using
trendlines.
This simple sketch shows the four signs you need in order to con rm a
reversal. Let’s go thru this using a bullish trendline example.

A break in the trend occurs. We have a break when the price closes a candle
below the trendline.

The price decreases further and creates a bottom, which is lower than the
previous price data inside the trendline. We draw a horizontal support line at
the swing low, which will be the trigger of our reversal con rmation.

The price then increases and tests the already broken trend as a resistance.

The retest does not have to touch the broken line. The reason for this is that
the trendline must be viewed as an area and not as a single line.
Furthermore, the price could even increase beyond the already broken
trendline area.

The price decreases again and breaks the already established support level
(red line). This is the reversal con rmation signal. When you get this fourth
signal, you have a strong reason to believe that the price will reverse
direction. You could short the currency pair based on strong reversal belief. It
is also important to point out that aggressive traders may look to sell at the
retest of the trendline. This provides higher pro t potential, and experienced
price action traders typically prefer this type of entry.
The same indications are in force for a bearish trend, but everything is in the
opposite direction. Let’s now see how these four rules apply to our GBP/USD
chart we discussed above.

This is the same parallel trendline drawn as a channel on the weekly GBPUSD
chart we discussed above. This time, though, we interested in the in the
events after the trendline gets broken.

We have the numerated dots indicating the four phases of the reversal
process. #1 points to the moment when the price breaks the bullish trend
line. Notice the strong red candle that closes outside the upward sloping
trendline. This is considered a high momentum breakout to the downside.
#2 shows the price decrease below its previous bottom and the swing low
that was created. #3 shows the retest of the broken trendline which is now
considered resistance. Aggressive traders will look to enter in this area. A
good entry point would be after the close of the strong red candle that
follows the doji bar at new trendline resistance. And #4 shows the strong
breakdown below the swing low.

Notice the strong red bar which closes sharply below the support swing line.
This would be a con rmed short opportunity in the GBPUSD. After that,
Cable drops signi cantly over the next a 5-month period.

This type of trendline trading system gives you a clear picture of what is
currently happening with the trend of a currency pair.

Conclusion
 Trendlines are a crucial analysis tool for price action traders.
There are two types of trendline:
Bearish Trendlines
Bullish Trendlines
When you draw a trendline you should take into consideration:
The candle body bottoms and the lower candlewicks for bullish
trends
The candle body tops and the upper candlewicks for bearish
trends
Remember these three important rules when you analyze potential
trends:
You need at least three points lying on the same line in order to
con rm tendency.
The trendline responds to an area and not to a single line on the
chart.
Typically The older the trend, the wider the trend volatility zone
There are three main trendline trading strategies that can be used:
Trading in the direction of Trending Moves
Trading Corrections of the Trendline
Trading Trendline Breaks

What is Support and Resistance?

One of the most crucial skills in Forex Trading is the process of nding
support and resistance levels. This is so because knowing the basics of
support and resistance would improve upon any trading method. Therefore,
recognizing key levels is crucial to the success of any trader. In this article I
will teach you how to identify these key levels and how to bene t from
them. But rst…

Support and resistance are speci c levels or zones on the trading chart,
where the price of a Forex pair (or equity, commodity, etc.) is likely to nd
opposition. The reason for this is that these are psychological levels showing
the different attitudes of the market players.

When price meets such levels it could lead to a bounce in the opposite
direction of the trend or to consolidations (horizontal movement of the
price). Also, the level could be broken and the price could make a rapid
move.

Support and resistance areas are the zones where the interests of the
market players intersect. Imagine a simple “Tug of War” game, where two
teams are pulling a rope over a mud puddle. The weaker ones lose and end
up in the mud puddle.
In our case these are the bulls and the bears ghting for dominance in the
market. Some of them believe that the Forex pair will go up and some of
them believe that it will go down. Therefore, we have a clash between
buyers and sellers. The ones who prevail will push the Forex pair in their
respective direction. Support and Resistance is essential to any price action
trading strategy.
What is the difference between a support and a
resistance?

The answer to this question is very simple. Supports are the levels which are
beneath the current price, while resistances are the levels above.
Furthermore, when price goes down through a support level and breaks it,
this level becomes a new resistance and vice versa. In other words, when
breaking the level in a bearish direction, price relocates under that level and
the old support levels now becomes a new area of resistance. Have a look at
the image below:

This is the daily chart of the most traded Forex pair – EUR/USD. The chart
covers the time frame Sep. 1 – Nov. 19, 2015. The green circles show the places
where the price gets supported by the purple 1.10957 level, the red circle
shows the moment when the price breaks this level in bearish direction and
the blue circle shows how the price tests the level as a new resistance.
This example shows how a support could turn into a resistance and how it
could start acting as a level with opposite force.
How to find support and resistance levels?
For the most part, support and resistance levels are very easy to nd on the
Forex charts. Every bottom on the chart is a potential support and every top
is a potential resistance. Notice that I call these potential and not actual. A
potential support turns into an actual support, when the price conforms to
its level more than once.

If we see the price dropping to a level and then going back up, we consider
this area as an eventual point, where next time the market gets to that level,
it might nd opposition. If we see the price bouncing again from this level,
then we con rm the level as a support. Then we assume that the price is
likely to bounce off this support again in case of another drop. The same
applies for resistance levels.

Not all support and resistance zones are created equal. We are only
interested in trading valid supports and resistances as measured by their
authenticity and potential. There are weak supports and reliable supports.
There are weak resistances and reliable resistances.

As you probably guess, traders tend to stick with the more reliable levels, as
they are more likely to point to a successful entry and exit point. The more
reliable support and resistance levels are the ones, which are older and have
generally been tested more times. The picture below compares two levels –
a stronger resistance versus a weaker support:
Let’s take a look again at the EUR/USD Forex pair but this time on a weekly
chart. The image shows the move of the price between Nov. 2014 and Nov.
2015. The purple line is a 7-times tested resistance of the price, while the
yellow line is a 4-times tested support. The circles point the exact place
where the levels were tested. Since the purple level is older and has been
tested multiple times, it is the stronger level. The orange rectangle shows
the area where the two levels are consolidating, and bouncing back and
forth in an attempt to breakout of the range.

We can expect one of the two levels to be broken. Since the purple
resistance is older and has sustained the price longer than the yellow
support, I would prefer to take a market position in bearish direction,
because I assume that the yellow support will bend under the pressure of
the purple resistance. Actually, this is exactly what happens in the end of the
orange rectangle. The price gets through the yellow support, which from
now on should be called resistance as prices fall below the prior support
level.

How to set entry/exit points at support and resistance

levels?

As we have discussed, support and resistance levels are used to place entry
and exit points on the chart. If you learn how to operate with S/R entry and
exit points, you will set the ground basics of your Forex trading knowledge.
S/R entry and exit points are not just a newbie lesson!

These are the essentials of any Forex trading strategy, which every trader
should know how to use! The reason for this is simple – no matter the
strategy you use and the tools you apply, the price of every Forex pair
constantly approaches different support and resistance lines, and so we
must keep a watchful eye on price action surrounding these levels.

1) Setting entry points on S/R levels

Imagine the price of a Forex pair approaches an established support zone.

Since the support is old and many times tested, I assume that this support
level is reliable. For this reason I could try to enter the market and set an
entry point after the price touches this support level. The right way to do this
is to wait for the price to interact with the level rst.
When this happens, I enter the market with a long position only if the price
bounces in bullish direction from this level. If you go long on your support
level, the most logical place to put your stop loss would be below the
support area. You place your stop right beneath your support. Doing so will
limit your loss in case the bounce is a fake and the support gets broken in
bearish direction after all. Take a look at the example below:

This is a H4 chart of the AUD/USD showing the move of the price between
Jul 21 and Aug 5, 2015. The purple line is an old support level, which I consider
reliable and good for setting entry points. The image stages four cases to
enter the market on this support level. The blue arrows show the ascending
move we get after the price interacts with the purple support.

Notice case 3 where after a short increase, the price does a rapid drop and
hits our stop loss order. This is why it is paramount to always use a stop loss
when trading. So, this support level gave us three good long positions and
one bad, which equals to 3:1 success rate. Note that setting entry points on
resistance levels works the absolute same way as setting entry points on
support levels, but in the opposite direction.

2) Setting exit points on S/R levels

In order to set an exit point on a support or resistance level, you should

already be in the market with a position. For this reason, imagine you have
bought a Forex pair and the price moves in bullish direction according to
your view. Suddenly, you see an established resistance area along the
uptrend and you think: “The price might bounce in bearish direction from
this old resistance and I might lose a big part of my pro t! I should secure
myself!” Therefore, you set an exit point on this particular resistance level.
The image below will make this clear for you.
This is the daily chart of the USD/JPY Forex pair for the period between Jan
14, 2015 and Apr 3, 2015. I am in a long position after the red bullish trend line.
The thicker parts of the trend show where the price nds support. While I
am in my long position, I see the price getting close to an old resistance,
which has already been tested few times and has sustained the price of the
Yen. Therefore, it is a good approach to secure my position with an exit point
below this resistance in order to avoid loss of already gained pro t.
Whenever the price touches the resistance, a stop loss could be placed
below the candle, which has touched the level. On the image above this is
the small orange line. If the price breaks the resistance in bullish direction,
then I can reopen my position. But if the price does a rapid drop, I am
protected with a stop loss order like in the example above. The stop loss
covered us for the rapid decrease, which even got the price out of the red
bullish trend.

But what if the price bounces from the resistance but then bounces up
again from the red trend? In this case, if I see the price bouncing up, I go
long and play again the resistance game with the stop loss. Note that in my
example, the quick drop brought a bearish candle far below the trend, which
infers the end of the bulls. Therefore, the exit point beneath the purple
resistance saved me from an unwanted loss of pro t. This same scenario
could be played with an exit point on a support level, but in the opposite
direction.

How to trade support and resistance?

For some newer traders, trading support and resistance using an additional
Forex tool on your chart for con rmation can sometimes prove helpful. The
reason for this is that support and resistance trading can give us false signals
from time to time. For this reason some price action forex traders tend to
con rm the signals they get with additional trading tools like candle
patterns, chart patterns, oscillators, momentums, etc.
One of the most common ways to trade key levels is simply by trying to go
with the market ow after the price has shown its bias toward a support or a
resistance level.

Buy when the price approaches a support and starts bouncing in bullish
direction and sell when the price touches a resistance and starts bouncing
in bearish direction. Also, buy when the price breaks resistance and sell
when the price breaks support.

For example, the price touches a resistance and bounces in bearish

direction. The rst candle, which closes lower than the prior candles could be
used as a trigger of a short position. At the same time, I stay in the market
until the price reaches the next important support zone and closes a candle
above the previous one. If this happens I close my short position. At the
same time, this gives me a signal to open the opposite position. For this
reason, I could go long and do the same but in the opposite direction.

I am providing a basic illustration for our purposes here, but in reality, it is not
quite as clean cut as we would like at times. You might nd it useful to
combine support and resistance with some other con rmation tools to help
in your trading decisions. In this next example, I will show you how to trade
S/R levels with the help of the well known Momentum Indicator.

The Momentum Indicator consists of a curved line, which bounces around a

100 or a 0.00 level depending on the different con gurations of the indicator.
The Momentum compares the current state of the price to its previous
behavior certain periods ago, creating the curved line. The basic signal which
the Momentum gives is with crossing the 100-level line in bearish or bullish
direction, giving short or long signals respectively.

For this reason it is a good tool to verify signals and it will suit our S/R trading
strategy. I will open a position whenever the price reacts to an S/R level, only
if this behavior is con rmed by the Momentum Indicator. At the same time, I
will exit the market only if the Momentum Indicator starts behaving the
opposite way. Take a look at the picture below.
This is the daily chart of EUR/USD between Sep 16, 2015 and Dec 4, 2015. The
purple line is an important level, which in our example is acting as a support.
This level has been tested as a support and resistance more than 5 times
during the last year. Therefore, I consider this a key level and I try to trade it!
As you see on the image, during the last meeting of the price with the
purple support, the bearish candle closes a bit below the level.

Meanwhile, the Momentum breaks the 100-level in bearish direction, which

gives me the second signal I need and triggers my short position. I go short
after the steady bearish trend marked with the green corridor on the chart.
Little by little, the bearish trend starts slowing down and I get a “Warning!”
signal when the trend gets broken in bullish direction.

Even though, I stay in the market until I get a bullish signal from the
Momentum Indicator. This happens in the blue circles when the
Momentum breaks its 100-level in bullish direction and gives me a bullish
signal. This is my exit point and I go out of the market. The short position
brought me a pro t of nearly 450 bearish pips for a period of 6 weeks.

Conclusion
Support and resistance are chart zones, which mark psychological
trading levels.
S/R trading levels are used to set entry and exit points on the chart.
Support is a level below the current price. Resistance is a level above
the current price.
Any bottom could be a support and any top could be a resistance.
The more the level is tested, the more reliable it is.
Support and resistance trading could be used in a combination with
additional trading tools, like the Momentum Indicator, in order to isolate
as many false signals as possible.
Support and resistance levels are essential for any Forex trading
strategy.
What are Forex Reversal Patterns

Knowing when to enter the market is one of the most important skills in
Forex trading. We should aim to hop into emerging trends as early as
possible in order to catch the maximum price swing. One of the best ways to
do this is by predicting potential reversals on the chart. In this lesson, we will
discuss some of the top Forex reversal patterns that every trader should
know.
Chart patterns can represent a speci c attitude of the market participants
towards a currency pair. For example, if major market players believe a level
will hold and act to protect that level, we are likely to see a price reversal at
that level.
Forex reversal patterns are on chart formations which help in forecasting
high probability reversal zones. These could be in the form of a single candle,
or a group of candles lined up in a speci c shape, or they could be a large
structural classical chart pattern.
Each of these chart formations has a speci c reversal potential, which is used
by experienced traders to gain an early edge by entering into the new
emerging market direction.

Types of Reversal Chart Patterns

There are basic two types of trend reversal patterns; the bearish reversal
pattern and the bullish reversal pattern.
The Bullish reversal pattern forecasts that the current bearish move will be
reversed into a bullish direction.
The bearish reversal pattern forecasts that the current bullish move will be
reversed into a bearish direction.

Top Candlestick Reversal Patterns

We will start with four of the most popular and effective candlestick reversal
patterns that every trader should know.

Doji Candlestick Pattern

The Doji candle is one of the most popular candlestick reversal patterns and
it’s structure is very easy to recognize. First, the Doji is a single candle
pattern. The Doji candle is created when the opening and the closing price
during a period are the same. In this manner, the Doji candle has no body
and it looks like a cross. The Doji can appear after a prolonged price move, or
in some cases when the market is very quiet and there is no volatility. In
either case, the Doji candle will close wherever it has opened or very close to
it.

The Doji candlestick is typically associated with indecision or exhaustion in

the market. When it forms after a prolonged trend move, it can also provide
a strong reversal potential. The candle represents the inability of the trend
riders to keep pressuring the price in the same direction. The forces
between the bears and the bulls begin to equalize and eventually reverse
direction.

In the case above, you see the Doji candle acting as a bearish reversal signal.
Notice that the price action leading to the Doji candle is bullish but the
upside pressure begins to stall as evidenced by the Doji candle and the two
candles just prior to the Doji candle. After the appearance of the Doji, the
trend reverses and the price action starts a bearish decent.

Hammer / Shooting Star Candlestick Patterns

The Hammer candlestick pattern is another single candle which has a

reversal function. This candle is known to have a very small body, a small or
non-existent upper shadow, and a very long lower shadow. The Hammer
pattern is only considered a valid reversal signal if the candle has appeared
during a bearish trend:
This sketch shows you the condition you should have in order to con rm a
Hammer reversal. It should be noted that the hammer candle itself could be
bullish or bearish and this wouldn’t change its function. There are four similar
variations of the Hammer candle, depending on the trend and the candle’s
structure:
In the rst two cases, you have a bearish trend, which reverses to a bullish
price move. The difference between the two candles is that in the second
case the long wick it positioned in the opposite direction and this formation
is called an Inverted Hammer.

In the second two cases we have a bullish trend which turns into a bearish
trend. If the long shadow is at the lower end, you have a Hanging Man.

If the long shadow is at the upper end, you have a Shooting Star. In all four
cases it doesn’t matter whether the reversal candle is bullish or bearish. This
doesn’t change its function.

Now let’s approach a Shooting Star example:

The chart above shows you a Shooting Star candle, which is part of the
Hammer reversal family described earlier. The shooting star candle comes
after a bullish trend and the long shadow is located at the upper end. The
shooting star pattern would signal the reversal of an existing bullish trend.

Engulfing Candlestick Pattern

The next pattern we will discuss is the Engul ng pattern. Note that this is a
double candle pattern. This means that the formation contains two
candlesticks. The engul ng formation consists of an initial candle, which gets
fully engulfed by the next immediate candle. This means that the body of
the second candle should go above and below the body of the rst candle.
There are two types of Engul ng patterns – bullish and bearish. The bullish
Engul ng appears at the end of a bearish trend and it signals that the trend
might get reversed to the upside. The rst candle of the bullish Engul ng
should be bearish. The second candle, the engul ng candle, should be
bullish and it should fully contain the body of the rst candle.
The characteristic of the bearish Engul ng pattern is exactly the opposite. It
is located at the end of a bullish trend and it starts with a bullish candle,
whose body gets fully engulfed by the next immediate bigger bearish
candle.
Take a moment to check out this Engul ng reversal example below:

This chart shows you how the bullish Engul ng reversal pattern works. See
that in our case the two shadows of the rst candle are almost fully
contained by the body of the second candle. This makes the pattern even
stronger. We see on this chart that the price reverses and shoots up after
the Bullish Engul ng setup.

Trading Rules for Reversal Candle Formations

To trade reversing candles, you should remember a few simple rules

regarding trade entry, stop loss placement, and take pro t. We will go this in
the following section:

Trade Entry
The con rmation of every reversal candle pattern we have discussed comes
from the candle which appears next, after the formation. It should be in the
direction we forecast. After this candle is nished, you can enter a trade.

In the Bullish Engul ng example above, the con rmation comes with the
smaller bullish candle, which appears after the pattern. You can enter a long
trade at the moment this candle is nished. This would be the more
conservative approach and provide the best con rmation. Aggressive
traders may consider entering a trade when the high of the prior bar is taken
out (in case of a bullish reversal pattern) or when the low of the prior bar is
taken out (in case of a bearish reversal pattern).

Stop Loss

Never enter a candlestick reversal trade without a stop loss order. You should
place a stop order just beyond the recent swing level of the candle pattern
you are trading. So, if you trade long, your stop should be below the lowest
point of your pattern. If you are going short, then the stop should be above
the highest point of the pattern. Remember, this rule takes into
consideration the shadows of the candles as well.

Take Profit

The minimum price move you should aim for when trading a candle reversal
formation is equal to the size of the actual pattern itself. Take the low and
the high of the pattern (including the shadows) and apply this distance
starting from the end of the pattern. This would be the minimum target that
you should forecast. If after you reach that level, you may decide to stay in
the trade for further pro t and manage the trade using price action rules.

Top Reversal Chart Patterns

Now let’s switch gears and talk a bit about some classical chart patterns that
have a reversal potential. Two of the most popular and effective among this
class would include the Double Top / Double Bottom formation and the
Head and Shoulder pattern.

Double Top and Double Bottom

We will start with the Double Top reversal chart pattern. The pattern consists
of two tops on the price chart. These tops are either located on the same
resistance level, or the second top is a bit lower. The double top pattern
typically looks like the letter “M”.
The Double Top has its opposite, called the Double Bottom. This pattern
consists of two bottoms, which are either located on the same support level,
or the second bottom is a bit higher. The double bottom pattern typically
looks like the letter “W”.
These patterns are known to reverse the price action in many cases. Let’s
see the Double Top formation on a price chart:

Notice we have a double top formation and that the second top is a bit lower
than the st top. This is a usual occurrence with a valid Double Top Pattern.
The con rmation of the Double Top reversal pattern comes at the moment
when the price breaks the low between the two tops. This level is marked
with the blue line on the chart and it is called a trigger or a signal line.
The stop loss order on a Double Top trade should be located right above the
second top.
The Double Top minimum target equals the distance between the neck and
the central line, which connects the two tops.
The Double Bottom looks and works absolutely the same way, but
everything is upside down. Thus, the Double Bottom reverses bearish trends
and should be traded in a bullish direction.

Head and Shoulders

The Head and Shoulders pattern is a very interesting and unique reversal
gure. The shape of the pattern is aptly named because it actually
resembles a head with two shoulders.

The pattern forms during a bullish trend and creates a top – the rst
shoulder. After a correction, the price action creates a higher top – the head.
After another correction, the price creates a third top, which is lower than
the head – the second shoulder. So we have two shoulders and a head in the
middle.

Of course, the Head and Shoulders reversal pattern has its upside down
equivalent, which turns bearish trends into bullish. This pattern is referred to
as an Inverted Head and Shoulders pattern.

Now let me show you what the Head and Shoulders formation looks like on
an actual chart:
In the chart above we see price increasing just prior to the head and
shoulders formation. This is an important characteristic of a valid head and
shoulders pattern. The con rmation of the pattern comes when the price
breaks the line, which goes through the two bottoms on either side of the
head. This line is called a Neck Line and it is marked in blue on our chart.
When the price breaks the Neck Line, you get a reversal trading signal. This is
when you would want to initiate a trade to the short side.
You should put your stop loss order above the last shoulder of the pattern –
the right shoulder. Then you would trade for a minimum price move equal to
the distance between the top of the head and the Neck Line.
The Inverted Head and Shoulders pattern is the upside down version of the
Head and Shoulders. The pattern comes after a bearish trend, creates the
three bottoms as with a Head and Shoulders and reverses the trend. It
should be traded in the bullish direction.
Forex Reversal Strategy

When using a reversal trading system, it is always a good idea to wait for the
pattern to be con rmed. I will present some con rmation ideas for you to
apply when trading trend reversals in Forex. In the following chart example, I
will illustrate ve reversal trades for you.

The image above is the H4 chart of the USD/JPY Forex pair for Sep, 2016. The
chart shows 5 potential trades based on a reversal trading strategy using
candlestick and chart patterns. Each of the trades is marked with a black
number at the opening of the trade.
The rst trade comes when we get a small Hammer candle, which gets
con rmed by a bullish candle afterwards. Note that after the con rmation
candle, price quickly completes the minimum target of the pattern.

Then we see a big Hanging Man candle (because it comes after an increase),
but the following candle is bullish, which provides no reversal con rmation.
Therefore, this pattern should be ignored.

Soon the price action creates a Head and Shoulders pattern. At the top of
the last shoulder we see another Hanging Man pattern, which this time gets
con rmed and completed. This is another nice trading opportunity. The stop
loss order should be located above the top of the upper shadow of the
Hanging Man.

This trade could actually be extended by the con rmation of the big Head
and Shoulders pattern. Simply hold the Hanging Man trade with the same
stop loss order until the price action moves to a distance equal to the size of
the Head and Shoulders structure as calculated by the measured move. You
can close the trade after the target is completed at the end of the big
magenta arrow.

The price then consolidates and creates a Double Bottom pattern – another
wonderful trading opportunity. You can buy the USD/JPY when the price
breaks the magenta horizontal trigger line. Your stop should be located
below the second bottom of the pattern as shown on the image. You hold
the trade until the size of the pattern is completed.

The price action reverses afterwards and starts a bearish move. On the way
down we see a Hammer candle in the gray rectangle. However, the next
candle after the Hammer is bearish, which does not con rm the validity of
the pattern. For this reason, this Hammer candle should be ignored.

The next trading opportunity comes after an upward price swing. In the last
blue rectangle you see a Shooting Star candle pattern with a very big upper
shadow. This increases the reliability of the pattern. You could open a short
trade when the next bearish candle completes to con rm the shooting star
pattern, or if you want a more aggressive entry, you could have entered short
when the low of the shooting star candle was taken out. The stop loss order
should be placed above the upper shadow of the candle. Then you would
want to hold the trade for at least the minimum price move equal to the size
of the Shooting Star.

Conclusion
 Forex reversal patterns are on chart candlestick formations of one or
more candles or bigger chart patterns which forecast price reversals.
Every chart pattern has a mass sentiment component that can help a
trader in gauging potential price swings.
There are two types of reversal chart patterns:
Bullish Reversal Chart Patterns – reverse the bearish move and
starts a bullish move
Bearish Reversal Chart Patterns – reverse the bullish move and
starts a bearish move
The top candlestick reversal patterns are:
Doji – The price closes wherever it has opened and creates a
candle with no body.
Hammer – It has a small body, one big shadow and another small
shadow. There are four variations of the Hammer candle
depending on the previous trend and the position of the candle.
Engul ng – It consists of two candles – a small candle and another
candle, whose body fully engulfs the body of the rst candle. There
is a bullish and a bearish Engul ng.
The top reversal chart patterns are:
Double Top – The price creates two tops on approximately the
same resistance level. The price is likely to start a bearish move
afterwards. The opposite equivalent of this pattern is the Double
Bottom.
Head and Shoulders – The price creates a top, a higher top, and a
lower top afterwards. The price is likely to start a bearish move
afterwards. The opposite equivalent of this pattern is the Inverted
Head and Shoulders.
When using a Forex reversal strategy you would want to open a trade
when you get a pattern con rmation and to hold for at least the
minimum price projection based on the structure of the pattern.

Technical Chart Patterns

Analysing the Forex markets, and broader nancial markets in general, is an

exciting and captivating endeavour that can be incredibly lucrative when
done correctly. While the internet is full of weird and wonderful ways to
analyse and trade the markets, in general there are two camps when it
comes to trading the markets; fundamental and technical analysis.
Fundamental analysis broadly comprises analysing the markets based on
economic and political inputs. Monitoring economic data releases is key to
this method as is tracking central bank monetary policy. However, the truth
is that trading in this manner can be very hit and miss. It is incredibly dif cult
to consistently gauge how the markets will react to data releases and even
central bank announcements given the nuanced way in which the markets
trade around fundamentals.

In reality, fundamental trading tends to be the domain of institutional

traders given the complex algorithms they have which can track and react
to these data inputs. For most retail traders, the most popular and effective
way of trading the markets continues to be technical analysis.

At its purest level, technical analysis is simply the study of the price charts.
Regardless of what is driving the price action, the technical analyst is merely
concerned with how price is moving and identifying tradable patterns and
outcomes. To do this, the technical analyst relies on a number of different
analysis tools on their technical analysis charts. Of these, trading chart
patterns are among the primary methods used.

Forex trading chart patterns are price structures which have been
established over time and studied and are identi ed as leading to tradable
outcomes. These structures, when identi ed in the market, carry with them
the weight of a potential tradable outcome such as a head and shoulders
pattern leading to a bearish reversal (a decline in price) or a double bottom
leading to a bullish reversal (a rally in price). As such, trading chart patterns in
technical analysis is an incredibly simple yet effective way of trading the
markets.

What Do Chart Patterns Tell Us?

Far from simply being some pretty decorations on your charts or random
lines drawn in at will, correctly identi ed chart patterns reveal a great deal
about the underlying order ow in the markets and give us hints about
where price might head next. Armed with that information we are then able
to make price forecasts and trading decisions.

So, let’s take a look at the top chart patterns, explain what they tell us about
the markets and how we can trade them.

Top Trading Chart Patterns in Technical Analysis

Head & Shoulders Pattern (H&S)

The rst chart pattern we will study can be considered the grandfather of
forex trading chart patterns; the head and shoulders (H&S).

The H&S pattern is a bearish reversal pattern which alerts us to a potential

reversal lower in price. The pattern is identi ed as follows (and hence the
name).

Firstly, we have an initial price high, giving us our left shoulder, we then have
a higher peak in the middle, giving us, our head and we then have a lower
peak, around the same level as the rst, on the right giving us our right
shoulder. The two low points in the pattern give us our neckline. That is the
H&S pattern, very simple to spot!
So, what is this pattern telling us about the underlying order ow in the
market? This pattern actually reveals a great deal about the underlying
action between buyers and sellers. So, initially we see that buyers are in
control, driving price higher to the rst peak, the left shoulder. From here,
sellers then step in and take price down. However, buyers step back in and
in fuller force driving price back up above the initial peak to give us a new
high, our head.
However, sellers step back in here and drive price rmly lower, all the way
back down to what will become the neckline. From there, buyers then step
in again and drive price back up. However, they are unable to make it past
the point of the rst peak. From here, sellers drive price back lower and this
time price breaks below the neckline of the pattern con rming a bearish
reversal from which, price sells off.
So, essentially what this pattern is revealing to us is a shift in power between
buyers and sellers. Buyers are in control initially, go through a battle with
sellers and are eventually overpowered by selling pressure and the market
reverses lower.

How to Trade the Pattern

So, in terms of how we trade this pattern, the most common way of trading
the pattern is to wait for price to break below the neckline following the sell
off from the right shoulder. As price breaks down through the neckline at
this point, we can enter a sell position.

In terms of stop loss placement, the typical method is to place a stop above
the right shoulder and then target a minimum of twice our risk (distance
between entry and stop loss). Doing this ensures that we achieve a positive
risk reward ratio on our trade and sticking to this over time is a great way of
boosting your chances of achieving and maintaining pro tability.

Inverse Head & Shoulders Pattern (IH&S)

Now, as well as being a bearish reversal pattern, there is also a bullish version
of this pattern, used to highlight a potential reversal higher. This pattern is
called the inverse head and shoulder pattern (IH&S).

So, this time around, we identify the pattern as follows and as you will see,
everything is simply ipped on its head.
We have an initial price low on the left from which price bounces higher,
giving us our left shoulder. Price then reverses lower and trades down to
fresh lows before again rebounding higher, giving us our head. From here,
price trades up to around the previous high and then reverses lower once
again. This time price trades down to around the same level as the rst low
and then reverses and trades higher.

So, this time around the pattern is highlighting a shift between buyers and
sellers where sellers are in control initially, there is a battle and buyers
eventually overpower them and take the market higher.

How to Trade the Pattern

So, this time around, the way we would trade the pattern is that we would
look to enter a buy position as price breaks above the neckline, con rming
the bullish reversal. We know that buyers stepped in with full force at the
low of the pattern (the head) and so once price breaks above the neckline
we can enter our buy position. This time around we would place our stop
below the low of the right shoulder (remember, we are simply doing the
inverse to what we would do with H&S pattern). Once again terms of a target
we would look to target a minimum of twice our risk.
So, hopefully you can see just how useful this pattern can be in identifying
potential reversals within the market and nding great trade locations. This
pattern is fantastic because it can be used in all instruments and assets and
traded on all time frames. So, whether you are conducting intraday chart
analysis or looking to swing trade on the higher timeframes the H&S and
IH&S patterns are a really effective tool for helping you capture reversal
points on your technical chart.

Double Top Chart Pattern

Another top technical chart pattern we are going to look at here is the
double top. The double top is a bearish reversal pattern, just like the H&S
pattern, which highlights a potential reversal lower and offers us the chance
to enter a sell trade.

The pattern is again very easy to identify via the following structure.
So, initially we see price driving higher within a bullish rally taking us up to
our rst peak, where sellers step in and affect a reversal. From here price
trades lower. However, this reversal does not last, and buyers once again step
back in to take price back up. Price then trades back up to test the
resistance level created at the initial high. However, as price tests the high,
sellers once again step in and drive price lower. From here price then
reverses lower and breaks through the initial low (the neckline of the
pattern).

So, as you can see, once again what this pattern is highlighting is a battle
between buyer and sellers where sellers overwhelm buyers and send price
lower, similar to the H&S pattern.

So, in terms of how we trade this pattern, the typical method is to place a sell
trade as price breaks down below the low of the neckline. Once again, the
neckline is the key pivot to watch and as price breaks below here, it con rms
the bearish reversal, offering us the opportunity to sell. In terms of stop loss
placement, we would place our stop above the high of the second peak and
then target a minimum of twice our risk.

Combining Indicators & Patterns

The beauty of trading chart patterns is that you can also combine them with
other charting and technical analysis methods such as technical indicators.
As we have discussed in other articles, one of the most powerful ways of
increasing our chances of success with any given trade is to look for
con uence between different technical signals. So, in this instance we would
look to establish a bearish signal on a technical indicator along with our
bearish double top pattern, giving us extra indication that the market is
likely to reverse lower.

Once such indicator which is very useful in these scenarios is the RSI
indicator. The RSI is a momentum indicator meaning that it measures the
strength of price moves in the market and signals when momentum is
either overbought (stretched to the topside) and vulnerable to a reversal
lower or oversold (stretched to the downside) and vulnerable to a reversal
higher. Now, one particularly powerful way in which we can employ this
indicator in tandem with our double top pattern is to look to establish
bearish divergence on the RSI indicator as the second peak forms.
If you are unfamiliar with the term, bearish divergence essentially refers to a

situation where the moves on the price chart are not supported by the

indicator. So, bearish divergence is identi ed when price is trading higher,

but the indicator is not trading higher. This tells us that bullish momentum

is waning in the market (buying pressure is weakening) and price is

vulnerable to a reversal lower.

So, let’s think about this: we have our double top pattern which we know

suggests a bearish reversal is likely coming and then on top of that we have

the RSI indicator telling us there is bearish divergence in the market. This is a

strong signal that the market is likely to roll over.

Example of Bearish RSI Divergence with Double Top

Pattern
So, in the example above you can see exactly this situation in play. Price
trades up to make the initial high before selling off and trading back down to
what will become the neckline of the pattern. From here, price then trades
back up and retests that initial high. Now, you can see here that as price
tests the level, the RSI indicator is actually putting in a much lower peak.
This tell us that buying pressure is far weaker at the level than it was the rst
time around.

And so, as price reverses from here we know we have a strong signal to set a
short position and capture the reversal. This is a fantastic example of the
power of technical analysis and how we can use chart pattern in
combination with indicators to nd great trade entries.

Double Bottom Pattern

Now, as well as being a bearish reversal pattern, there is also a bullish version
of the pattern which we can use to capture a reversal higher in price; this
pattern is known as the double bottom. As when discussing the H&S and
IH&S patterns, this time around, everything is simply upside down once
again.
So, we identify the double bottom pattern by rst seeing price trading lower
within a bearish move. Price then puts in a low, giving us our initial swing low
before reversing higher. However, sellers then step in once again taking
price lower. Price then trades back down to test the initial low, but once
again, buyers then step in here and take price back up.

So, as you can see, this time around the pattern is highlighting a battle
between buyers and sellers in which buyers overwhelm sellers and take
price higher. So, this offers us the opportunity to set a buy trade as price
breaks above the neckline of the pattern. As with the previous patterns, we
want to enter our buy trade as price breaks the neckline and place our stop
loss below the low of the pattern, targeting a minimum of twice our risk.

Combining Patterns and Indicators

Now, given what we know about this pattern, that it is a bullish reversal
pattern and we are anticipating a break higher in price, one more advanced
way to trade the pattern is to look to get in early as the reversal off the
double bottom support level occurs. Now, this is inherently a slightly riskier
approach as until the neckline has been broken the pattern is not yet
con rmed.

However, once you have spent enough time identifying and trading these
patterns, this is a method which can work very well because the upside is
that you get in much earlier on the move giving you a greater potential
pro t.

One such way to do this is to use the stochastics indicator. Similar to the RSI,
the stochastics indicator is an indicator which measures momentum in the
market and identi es price moves as being either overbought or oversold.
So, one way in which this indicator can be useful is to wait for price to test
the double bottom and look to see the indicator move below the oversold
threshold, telling us that price is overextended to the downside and
vulnerable to a reversal higher. Once the indicator then crosses back above
the oversold threshold, this is our buy signal, suggesting a reversal higher is
coming.

Double Bottom & Stochastics Example

In the chart above you can see an example of this happening. So, price
trades down and tests our double bottom support level which we have
already marked out. As it does so we can see that the stochastics indicator
has gone below the oversold threshold, telling us the move is overstretched.
Then, as price starts to bounce off the level, we see the indicator crossing
back above the threshold, giving us our buy signal. We can once again place
our stop just below the low of the pattern and this time, play for a much
bigger target due to our earlier entry. We still also have the option of adding
an entry as price breaks out above the neckline.

Considerations When Trading Chart Patterns

Hopefully by now you are feeling pretty excited by the potential chart
patterns have to help us analyse and forecast the forex markets. As we
discussed earlier though, these patterns can be used across all asset and
instruments and so the patterns discussed here will be just as useful in
share market chart analysis. When trading these patterns as share market
chart patterns, we look for exactly the same parameters and trade the
patterns in exactly the same way as we do with the forex trading chart
patterns. Many traders use these patterns for share market chart analysis
and again, these can be used on all timeframes.

Ultimately, technical analysis and chart interpretation comes down to

practice and skill. The more time you spend studying the charts and
practising identifying these trading chart patterns, the better you will
become at actually trading patterns using technical analysis.

Trading Pullbacks Within A Trend

Trading pullbacks in a trending market is one of the most time-tested Forex

trading strategies out there. The beauty of a well thought out pullback
trading system is that you enter the market or place your rst trade only
after con rming which way the market is going. Doing this is going to help
you eliminate entering the market with a false signal, where the price of the
Forex pair initially appears to be going in a particular direction, but then
suddenly makes a sharp u-turn.

Since currency pairs remain within a range bound or consolidation phase

most of the time, and the market trends only about 20 percent to 30
percent of the time, nding an established trend to trade pullbacks in can
be a challenging task.
As a Forex trader when you are trying to apply a pullback trading strategy,
you need to act like a sniper. You need to wait, then wait some more,
sometimes for hours – if not days – before pulling the trigger.

Consequently, you need to make sure that you have identi ed the possible
turning point, where the retracement move is likely to end. You need to nd
a way to generate a high probability pullback signal where the price is likely
to resume the prevailing trend.

If you can successfully apply a pullback trading system, you can buy low
during an uptrend and sell high during a downtrend. This means your stop
loss could be much closer to your entry if you place the order during a
pullback or retracement compared to placing the order when the price was
moving in the direction of the trend.

So, in a nutshell, there are three basic steps that you need to take to
successfully trade pullbacks within a trend:

. Identify an existing trend

. Identify potential reversal areas or market conditions where the
retracement of the trend may resume the prevailing trend
. Apply a pullback trading strategy that offers high-quality trading signals
to time your market entry so that you are executing a trade that offers a
high reward to risk ratio.

Nevertheless, before we dive into discussing real world scenarios and

examples, you should get familiar with the theoretical aspects of why trading
pullbacks during a trending market work in the rst place.

If you have been trading Forex for a while, you have certainly heard the wise
axiom that “the trend is your friend”. However, professional Forex traders also
know that the trend is only your friend “until it ends”.

You see, most of the time the Forex market remains in equilibrium, where
major market participants have access to all the major news developments
and information about a particular country’s currency. As a result, the Forex
pair’s price uctuates a bit throughout the day, but absent of any new
information, it usually doesn’t have any particularly strong directional
movement.
However, after high-value news releases about economic fundamentals, if
the actual data diverges from the market’s consensus, we can see sharp
price movements because here, the market is trying to interpret the new
information to nd a new equilibrium.

Bulls and Bears sometimes have a unique interpretation of developing

economic fundamentals, and they put their money behind their respective
interpretations. When the majority of the market participants or even a few
large institutional players believe the price should go up or down, this supply
and demand imbalance can act to drive prices sharply higher or lower.

If you have ever watched Level II order ow, you can see how the price
triggers each order as prices are moving up or down. Now, once the market
starts pushing the price up or down, and establishes a trend, at some point,
some traders would start taking pro t off the table. They may be thinking
that the price will not go much higher or lower, or they just simply want to
secure some of their earned pro t. Regardless of the motivation, these
trading decisions can decrease the trend momentum, and as this happens
we start to see pullbacks emerging in the market.

Often, you would see that these pullbacks come close to a previous
consolidation zone or pivot points on the chart. Often these pullbacks test a
prior Support and Resistance level. Since Forex traders know these levels
have previously acted as pivot zones, a large amount of pending orders
accumulate around these price levels.

As a result, when a pullback of the trend reaches these price levels and if
there were suf cient orders in the market in the direction of the trend, the
market resumes the trend. Otherwise, the support or resistance levels break,
and a trend reversal may ensue in the market.

Remember that while identifying a trend can be relatively easy using a

naked chart or with the aid of a few technical studies, knowing if the trend is
strong enough or gauging the probability of the trend to continue after a
pullback is a bit more dif cult to accomplish. Having said that, it is quite
doable if you apply the right technical analysis tools and have a
comprehensive strategy to trading pullbacks.
For most new traders, it is strongly recommended that at the beginning
stage that they try to stick to trading pullbacks in a trend rather than
engage in counter trend or mean reversion methods. The best aspects of
trading pullbacks during an established trend is that even if the price of the
Forex pair goes beyond your initial entry point, you will typically have a
chance at re-entries.
However, as you gain more experience trading pullbacks in the forex market,
you can then move on to developing more sophisticated strategies to
compliment your trend pullback strategy. But again, if you are a newbie,
then you would do best to start by focusing on picking the low-hanging
fruit, which in this case is trading pullbacks during a trending market.

Identify the Underlying Trend

The rst step towards learning how to trade pullbacks is to recognize a trend.
If the price on the left of the chart is lower than it is on the right, and making
higher highs and higher lows, then you are watching an uptrend in action.
On the other hand, if the price on the left of the chart is higher than it is on
the right, and making lower highs and lower lows, then you are watching a
downtrend. It is that easy to identify an underlying trend in the market and
something that all traders should be able to do rather quickly. You can also
use two moving averages and con rm the trend when a crossover happens
as well as use it as a con rmation of the pullback resuming the prevailing
trend.
Figure 1: Moving Average Crossover Con rms When a Pullback Resumed
During an Uptrend

In gure 1, you can see the GBPUSD was on an uptrend, as identi ed by the
Green uptrend line. However, by adding two moving averages, a 13-period
Red EMA and a 21-period Green EMA, we can con rm the temporary
momentum in the market.

When the Red EMA crossed below the Green EMA, it signaled a pullback. As
soon as the Red EMA crossed back above the Green EMA, it indicated that
the GBPUSD pullback has ended and the uptrend resumed.

Figure 2: Moving Average Crossover Con rms When a Pullback Resumed

During a Downtrend

Similarly, in gure 2, we can see that when the Red EMA crossed above the
Green EMA, it signaled a pullback. As soon as the Red EMA crossed back
below the Green EMA, it signaled that the GBPUSD pullback has ended and
the downtrend resumed.

However, there is a major shortcoming of using EMA crossovers for spotting

a pullback or trigger a market entry. If the pullback momentum is not that
strong, like in the rst instance in gure 2, the EMA crossover might never
happen, and the trend may resume, leaving you wondering when to enter
the market.
Furthermore, an EMA crossover acts as a lagging indicator, and by the time it
generates a signal, the market may have moved quite a bit in the direction
of the prevailing trend.

As a result, the reward to risk ratio of your trade may be decreased as well.
Hence, it would be much better that you try to identify a potential reversal
area during a pullback and place your trades using more ef cient price
action based market entry methods.

Identify Potential Pullback Reversal Area

One of the central tenets of technical analysis is the fact that old resistance
turns into new support and old support turns into new resistance. By using
this principle, you can quickly identify where the market may reverse during
a pullback.

Figure 3: Old Support and Resistance Zones Are Often Potential Reversal
Areas During Pullbacks

In gure 3, you can see that the GBPUSD found strong resistance near the
1.5750 level twice. Once the price broke above this resistance level, the rst
pullback found strong support around this level.

Often you would nd that when you are trading pullbacks in a trend, these
old support and resistance levels provide an excellent location to place your
limit orders on the side of the prevailing trend.
In this instance, if you had placed a buy limit order a few pips above the old
resistance, you would have aligned yourself in the direction of the breakout
with an excellent reward to risk ratio, as the pullback did not penetrate
below the pivot line.

Figure 4: Fibonacci Retracement Levels Can Act as Potential Pullback

Reversal Zones

Besides identifying an old support or resistance level for possible pullback

reversal points, you can use another time-tested method. In this case I am
referring to utilizing major Fibonacci retracement levels. In gure 4, we have
drawn two Fibonacci retracement levels on the same uptrend at different
swing points using two colors. The Green colored Fibonacci retracement
levels identify the rst swing point and Black colored Fibonacci retracement
levels identify the second major swing point.
As you can see in gure 4, after the rst upward swing, the price had a
pullback to the 23.6% Fibonacci level, then resumed the uptrend. Once the
second upward swing was completed, the price had a pullback to the 38.2%
Fibonacci retracement level, then resumed the uptrend. If you apply the
Fibonacci retracement tool after the price makes a new high during an
uptrend or a new low during a downtrend, you would often nd that the
price of the asset is respecting these retracement levels. Major Fib levels act
as hidden support and resistance zones in the market. In addition, when you
have a con uence signal from both a horizontal Support / Resistance area
and a Fibonacci retracement level, then this will act to provide for a very high
probability trade setup.

Strategies for Entering the Market after a Pullback

For demonstration purposes, we have discussed two basic strategies to get

into the market during pullbacks. However, regarding the moving average
technique, you would be better off using it to to identify the trend only.

Then you can identify past support and resistance levels on the chart to get
an idea of where the pullback may end. Once you have learned to
successfully identify a trend, a pullback, and a potential area where the
pullback might end, then you can move on to apply a strategy to con rm
that the pullback has ended. The con rmation would be your trigger or
signal to enter the market.

When you are swing trading pullbacks, one of the best strategies to enter
the market is using price action bars. A simple pin bar or outside bar
formation near previous support or resistance, or near a moving average, can
act as a con rmation that the pullback is ending and the trend is about to
resume.
Figure 5: A Bearish Pin Bar Can Act as a Con rmation That the Pullback Has
Ended

In gure 5, you can see that the moving average crossover and the
downward sloping trend line con rmed that there is a downtrend in the
market. Once the downtrend was con rmed, you could identify that the
1.5750 level was acting as a signi cant resistance as the GBPUSD price got
rejected around this level a few times. However, instead of blindly entering
the market near this pivot zone, if you waited for the bearish pin bar to
appear, which con rmed that the pullback has ended, and entered the
market when the price penetrated below the low of the pin bar, the trade
would have yielded some nice pro ts with minimum risks.

You see, when you trade pullbacks by combining multiple factors, you are
leveraging the power of con uence and effectively increasing the odds of
winning. By using a con uence of an existing trend, support and resistance,
and price action bars, you are reducing your risk, while taking high reward to
risk trades.
When you are trading pullbacks using a con uence of several technical
factors, you are setting yourself up to trade very high-probability setups.
However, having a clearly de ned trading strategy that outlines under what
circumstances you would enter the market is also essential. You would wait
for con rmation after identifying a trend and a potential reversal zone,
instead of entering the market randomly or haphazardly. You are playing the
waiting game, where you are in complete control of the trade, including
where to get into the market, where to place your stop loss, and where you
may exit the trade.

Trading pullbacks requires patience and a healthy respect for risk. Taking a
detailed approach will help you develop discipline in your overall trading. A
beginner Forex should model how professional traders execute patiently to
try to increase their win rate as well as gain a favorable reward to risk ratio on
each trade. Regardless of whether pullback trading meets your trading style
or not, you must learn to trade any method you are comfortable with using a
prede ned set of rules that you will follow thru with conviction.

Who was Richard Wyckoff ?

As a trader, you should be familiar with some of the leading theories

concerning market structure and cycles. Some of the more popular ones
include the Elliott Wave Principle and the Dow Theory. Nevertheless, today
we will add one more important type of market analysis to your trading
arsenal. We will be taking a deep dive into the price action based
methodology known as the Wyckoff trading method.

Richard Wyckoff was a famous stock trader and investor who was born in the
late 19th century. Wyckoff was fascinated by the stock market at an early age,
and by the time he was in in his mid 20’s he was able to open up his rst
brokerage rm. Later, he authored several famous stock trading books, which
are still studied by today’s market players.

Two Rules of Richard Wyckoff

The Wyckoff theory is based primarily on price action and the different
cyclical stages the market falls in to. It is essential that we discuss two
important rules stated in his book “Charting the Stock Market”. These two
essential rules are paraphrased below.
 The rst rule of Richard Wyckoff states that the market never behaves
the same way. Price action will never create a move in exactly the same
way that it did in the past. The market is truly unique.
The second Richard Wyckoff rule is related to the rst one. It states that
since every price move is unique, its analytical importance comes when
compared to previous price behavior.

These two rules are essential for the information we will discuss next – the
Wyckoff Market Cycle theory.

Wyckoff Market Cycle Theory

Wyckoff developed a price action market theory which is still a leading

principle in today’s trading practice. The Wyckoff method states that the
price cycle of a traded instrument consists of 4 stages – Accumulation,
Markup, Distribution, and Mark Down.

Accumulation Phase

The process of accumulation is the rst stage of the Wyckoff price cycle. The
Accumulation stage is caused by increased institutional demand. Bulls are
slowing gaining power and as a result, they are poised to push prices higher.

Although the Accumulation stage is related with the bulls gaining authority,
the price action on the chart is at. In other words, the process of
accumulation is illustrated by a ranging price structure on the chart.

Higher bottoms within the range is usually considered a signal that the price
action is currently in an Accumulation phase.

Markup Phase

The Markup is the second stage of the Wyckoff trading cycle.

Bulls gain enough power to push the price through the upper level of the
range. This is usually a signal that the price is entering the second stage and
that a bullish price trend is emerging on the chart.

Distribution Phase

The Distribution process is the third stage of the Wyckoff price cycle. This
phase is where the bears are attempting to regain authority over the
market.
The price action on the chart at this stage is at, just as with the
Accumulation process. One indication that the market is in a Distribution
stage will be the sustained failure of price to create higher bottoms on the
chart.

The price action creates lower tops which is an indication that the market is
currently experiencing a selloff.

Markdown Phase

The Markdown is the last stage of the Wyckoff price cycle.

The Markdown process comes as a downtrend begins after the Distribution

phase. It indicates that the bears have gained enough power to push the
market in the bearish direction.

The Markdown is con rmed when the price action breaks the lower level of
the at range of the horizontal distribution channel on the chart.

Afterwards the entire process repeats starting from the rst stage – the
Accumulation process.

Below you will nd a sketch illustrating the concepts of the Wyckoff Price
Cycle:
The blue lines indicate the Accumulation process on the chart. Notice that
the rst two bottoms are increasing. This con rms that the market might be
accumulating at this point. The breakout through the upper level of the
Accumulation range con rms the end of the Accumulation and the
beginning of the Markup (green).

Then the decreasing tops within the upper range signal that the market
might be entering a Distribution. The breakout through the lower level of
the Distribution range con rms the end of the stage and the beginning of
the Markdown (red).

Accumulation / Distribution Price Spring

You may have noticed something on our Wyckoff market cycle sketch that
we did not mention yet. Did you notice that the price action dipped below
the Accumulation channel and went above the Distribution channel prior
the creation of the real breakout? This occurrence is called a Wyckoff spring,
which is essentially a false breakout. This is another strong con rmation that
the price action is following the Wyckoff market cycle.

The red circles on the image above show you how the spring appears within
the Wyckoff structure. The initial breakout (Spring) opposite to the expected
price move is used as a con rmation of the cycle unfolding. The spring is
often associated with stop running, wherein institutions push prices to
obvious stop loss areas to nd the required liquidity to ful ll their orders.

Three Laws of Wyckoff

Richard Wyckoff emphasizes three laws which are a natural cause of the
Market Cycle.

Supply vs. Demand

If there is greater selling pressure, caused by excess supply, we are likely to

see a decrease in price. If there is a greater buying pressure, caused by
excess demand, we are likely to see an increase in price.

Effort vs. Result

Wyckoff says that every effort should lead to a result in the nancial markets.
An example of the Effort vs. Result relationship is the data on trading
Volume. If there is an unusually high trading volume, we may expect a big
price move. So, the big volume bar is the effort of the market players to gain
dominance. The big market move is the result of that effort.

Cause vs. Effect

Wyckoff states that every cause in the market leads to a proportional effect.
Take for example the Accumulation and Distribution stages. Accumulation
leads to Markup and the price increases, and the Distribution leads to
Markdown and the price decreases. The Accumulation is the cause, and the
Markup is the effect.

Wyckoff Volume Spread Analysis

Volume is of a great importance for the Wyckoff trader, because it can

provide valuable information into what is really going on “behind the
scenes”.

Wyckoff Volume Analysis provides con rmation of progressing events

during the Wyckoff Price Cycle. As we pointed to earlier, high volumes can
lead to sustained price moves on the chart – the Result. However, this is not
all. Wyckoff Volume Spread Analysis also helps you identify periods when the
price is transitioning between the different stages of the Wyckoff Price
Cycle.

When the price moves through a key level during the Wyckoff Price Cycle,
you should consider the move valid if the trading volumes are relatively high
during the breakout. If the volumes are decreasing, then you are probably
looking at a spring (false breakout) rather than a real breakout. The chart
below provides an illustration of this phenomenon.
This is an example of an Accumulation stage of the Wyckoff cycle. Notice on
the chart that the rst two bottoms ( based on closing prices ) are slightly
increasing. This hints that the market is likely in an accumulating stage.
Suddenly, we see a bearish breakdown through the lower level of the blue
range. However, the volume is decreasing during the breakdown through
the level, which suggests that this could be a false break (Spring) before the
real breakout actually takes place.

The price reverses right after the breakdown, creating a couple of big bullish
candles. At the same time, the trading volume is increasing. This is a strong
indication that the Price Cycle is likely entering the second stage – the
Markup. Subsequently, price breaks the upper level of the range and begins
a sharp increase.

The bullish move slows down slightly during decreasing volumes. This hints
that the price action is likely to undergo a corrective move, which is exactly
what happens.

The resumption of the bullish move comes with the price action breaks
through the upper level of the corrective channel on increasing trading
volume.

How to Profit with Wyckoff Trading in Forex

Traders can use the Wyckoff Price Cycle to recognize upcoming price moves.
For example, the end of an Accumulation stage is the beginning of a
Markup, which could be traded to the long side. At the same time, the end of
a Distribution stage is the beginning of a Markdown, which could be traded
to the short side.

Understanding the different stages within the price cycle will allow you to
position for the next most likely price tendency. We can try to buy as close to
the beginning of a Markup and try to hold it as close to its end as we can. The
same practice is in force for shorting Markdowns.

Wyckoff Trading Strategy

After performing your Wyckoff Analysis, you should recognize the current
market cycle. In order to take advantage of the current cycle, we must have
a trading plan in place that we can execute on. So, let’s now discuss some
rules around a Wyckoff trading strategy, which will help you to initiate and
manage your trades within the price cycle.

Wyckoff Trade Entry

You should enter a trade when the price action is transiting from
Accumulation to Markup and from Distribution to Markdown. First, you
would need to con rm the current stage when the Forex pair is ranging. It
would help to identify increasing bottoms for an Accumulation and
decreasing tops for Distribution. In addition, it would be useful to analyze the
previous price move for additional clues.

Another way you can attempt to con rm an Accumulation or Distribution

stage is by identifying a Spring, which is the transitional price action behavior
that often occurs between the cycle stages.

Chart patterns can also be helpful in identifying Accumulation and

Distribution processes on the chart. The potential price move out of a
pattern could help you identify the transition to a Markup or a Markdown.

The actual trade comes when the price action breaks the range in the
direction of the expected move. For example, you could buy the currency
pair when the price breaks the at range through the upper level. Contrary
to this, you could sell the currency pair when the price action breaks the
lower support level of the Distribution area.
Also, you should keep an eye on volume for additional clues that con rm
that your decision is correct.

Wyckoff Stop Loss Order

As you are well aware, there is no sure thing in Forex trading. Therefore, you
should always use a stop loss order when opening a trade. If you are trading a
Markup, your stop loss order should be located below the lowest point of the
Accumulation stage. If you are trading a Markdown, then your stop loss order
should be positioned above the highest point during the Distribution stage.

Wyckoff Take Profit

You can use price action analysis in order to manage your take pro t points.
Let’s discuss a case where you trade a Markup.

One indication that the price is transiting from a Markup to a Distribution is

the presence of descending tops on the chart. This event should make you
aware that a possible selloff might be taking place now.

Another exit signal on the chart would be a bearish spring on the chart. If
you spot it, then you would want to exit your trade, because the price action
has entered the late stage of the Distribution curve.

The third manner in which you could manage your exit is by keeping an eye
out for developing chart patterns and candlestick patterns. Spotting a
reversal formation could be a signal that the price may due for a correction or
change of trend.

One thing is for sure, Wyckoff analysis and the price action techniques go
hand and hand. Therefore, price action analysis is a great way to initiate and
manage trades within the Wyckoff price cycle. You should always be exible
in your analysis and open to what the market is doing at any given time. Be
ready to act in a manner that is in tune with the current available market
information as evidenced on your price chart.

Now let’s show the Wyckoff market analysis in action, using the trading
strategy we discussed above. Have a look at this image:
Above you see the H4 chart of the USD/CHF Forex pair for May – July, 2016.
The image shows a Wyckoff based technical analysis approach for the
currency pair.

The image begins with the USD/CHF in a Distribution phase. Suddenly, the
price action breaks the upper level of the Distribution range. However, the
trading volumes at that time are decreasing, which calls into question the
authenticity of the upside breakout. Therefore, we can reason that a Spring
pattern on the chart may be forming.

The price action reverses afterwards and breaks the lower level of the
Distribution channel on increasing volume. You could sell the USD/CHF at
this moment placing a stop loss above the highest point of the Distribution
range as shown on the image.

See that the Markdown begins right after the selloff and the price of the
Swissy decreases more than 4% in less than a week. Then we see a sideways
movement, which hints that the Markdown phase is probably completed.
You would close your trade when the price action begins to create
increasing tops on the chart (yellow line). We also have a Double Bottom
chart pattern created at the rst two bottoms – another reason to close the
trade.

The price nishes the Markdown stage and starts an Accumulation, which
could be seen in the blue horizontal channel. During the Accumulation, we
see that the price drops on decreasing volumes and breaks the blue
channel downwards. Since the volumes are decreasing, we anticipate a
Spring pattern rather than a valid breakout.
Notice the Volume bar in the green circle. It reverses the decreasing volume
tendency. At this moment, the price action ends the Spring and starts an
increase. A few periods later, we see a breakout through the upper level of
the Accumulation channel. This is a strong buy signal, which you could use
to go long the USD/CHF pair. You should place your stop loss order below
the lowest point of the Accumulation process as shown on the image.

The price action enters a Markup stage afterwards. The USD/CHF Forex pair
rises creating higher highs. After a 3.67% increase the price action starts to
range. The purple triangle shows that the price action exits its green bullish
trend and creates a sideways movement. The downside break through the
green bullish trend line is a signal that the Markup stage is probably
completed and the new Distribution stage is on its way. Suddenly, the upper
level of the triangular range gets broken on decreasing volumes. This is
another Spring pattern on the chart. You could close your long position
there on the assumption that the price will reverse and enter a Markdown
stage.

Supply and Demand Trading

Understanding the reason why a currency pair moves is essential to

development of every forex trader. At the most basic level, price moves due
to supply and demand imbalances in the market at any given time. Once
you are able to grasp this concept, you can view trading from a logical lens.

Today we will discuss supply and demand trading strategies in Forex. We will
learn how to identify supply and demands levels and how to apply the levels
within a comprehensive trading strategy.

The supply and demand concept is a core component of economic theory.

The Supply and Demand rule states that if the supply of a commodity is high
and the demand is low, this generates excess which drives the price down.
And conversely, if the supply of a commodity is low and the demand is high,
this creates a scarcity, pushing the price higher.

The rule is pretty easy to understand and it could be applied to anything,

which falls in the group of tradable resources.

Applied to the forex market, if the supply for a currency pair is high and the
demand is low, it will drive prices lower. If the supply for a currency pair is low
and the demand is high, this will act to drive prices higher.
The supply and demand of a currency pair is determined by the players in
the Forex market. These are governments, banks, investors, funds, and
speculators. Thru their actions in the market, the participants in the Forex
market are constantly shifting the supply and demand of currency pairs,
causing the price to uctuate. If you open a currency trade you are taking
part in the supply and demand equation within that market.

What are Supply and Demand Zones in Forex

The supply and demand imbalances in Forex can be seen visually on the
price chart. Each tick on the graph represents changes in the traders’
attitude toward the respective pair. Thus, if traders have a certain bias for a
currency pair at a certain level, this can be recognized on the Forex chart by
the informed trader.

For example, if the currency pair is moving downwards on selling pressure,

some traders will position pending buy orders at certain levels below the
price. These people do not believe that the pair will go much lower beyond
their buy limit order. They place buy orders at this level to purchase the pair
on the assumption that the bearish move is likely to stall. If a large group of
people do this, or even if a large institution does this, there will be
accumulated a big volume of pending orders around this speci c level. This
means the demand will increase as price reaches this level, which is likely to
cause a sharp price increase as price approaches this level.

The same is in force in the opposite direction as well. When big volumes are
accumulated at a certain level above the price, the supply will increase,
which can cause the price to drop sharply upon reaching that supply zone.

As such, traders should be aware of these two important levels within their
charts, where prices are likely to rise and fall – the Demand Zone and the
Supply Zone.

Demand Zone

A Demand Zone is a price area below the current price action where there is
strong buying interest. Looking at the chart below, we can see that there
was a lot of buying interest at the demand zone, most likely caused by a
large volume of resting buy orders at this level. For this reason, when the
price reaches the demand level, as shown below, the orders get executed
and a certain portion of the pending order volume gets absorbed. Typically,
you will notice a sharp price reaction from the Demand Zone, and the
sharper the price reaction, the more pending buy orders are resting there.
Above you see the H4 chart of the USD/CAD Forex pair showing a strong
demand zone between 1.2400 and 1.2360. Notice that every interaction with
this level results in a price increase. It is important to refer to the Demand
levels as an area and not as a single line on the chart.

Supply Zone

The Supply Zone is the exact opposite of the Demand Zone. A Supply area is
located above the price action and it typically contains a relatively big
volume of sell orders. When the price action reaches this level, the orders
start to get executed. Traders are selling the Forex pair and the price action
reverses to the downside. As with the Demand, the Supply zone refers to an
area and not a single level.

Now we have the H1 chart of the GBP/USD Forex pair. This time the image
shows a supply zone on the chart. See that every time the price action
interacts with this supply area we see a decrease in the price.
As noted earlier, when the price action reaches a supply or demand zone, it is
likely to reverse its direction. Therefore, these zones are used by price action
traders to enter the market in the respective direction.

If the price action decreases to a demand zone and bounces upwards, this
creates an opportunity to trade the currency pair upwards. When the price
jumps to a supply area and bounces downwards, this creates an opportunity
to trade the market in a bearish direction.

Drawing Supply and Demand Zones

It is always a good idea to draw the supply and demand areas on the chart.
This way you will be aware visually where the zones are, and be prepared to
trade the market when the price reaches the appropriate S/D zone.

How to Find Supply and Demand Area on the Chart

So then the natural question becomes: “How do I nd supply and demand

areas on the chart?” Identifying supply and demand zones is fairly
straightforward once you know what to look for. First, zoom out your trading
time frame chart and switch to the next higher level time frame. The next
level timeframe is 4x or 5x, your trading timeframe. By doing this, you will
have a bird’s eye view on the overall price action.

Then nd turning points in the price action where prices have reacted
sharply. Typically, a turning point where the price moves quickly away from
the level downwards, can be considered a supply level. And conversely, a
turning point where the price moves quickly away from the level upwards,
can be considered a demand level.

When you nd the turning point zone simply grab a rectangular shape
drawing object from your trading platform and stretch it to the right.
Alternatively, there are some supply and demand trading indicators that are
available in the market that you may be able to use.
Above you will see the Weekly chart of the AUD/USD which displays a supply
level.

Supply and Demand Analysis in Forex

A supply and demand based trading system is a relatively simple, yet

powerful way to trade Forex. It is considered one of the purest price action
trading mythologies around.

The rules of supply and demand analysis in Forex are quite simple. You
should buy when the price action approaches a demand level and bounces
upwards. You expect the price to increase as a result of the aggregated buy
orders in the demand zone. Therefore, you have the opportunity to ride an
upcoming price swing.

You should sell when the price reaches a supply level and bounces
downwards. You assume that the price action will begin to trigger the
aggregated sell orders in the area, which is likely to lead to a price drop. Thus,
this creates an opportunity to ride a bearish move on the chart.

You would put a stop loss order right below the demand area when you are
long in the market. Conversely, put your stop loss order right above the
supply area.

The most common approach is to hold your trades until the price action
reaches the opposite level on the chart. So, if you are trading long a demand
level, you should hold your trade until the price action reaches the next
supply zone on the chart. Opposite to this, if you are trading short a supply
level, then you should hold your trade until the price reaches the next
demand level on the graph.
Many times, however, there is no clear level to target or it may be too far
away. Often the price may not likely be able to reach an opposite level during
its move. Therefore, I suggest you also use simple price action derived
analysis when you determine your exit point on the chart. To do this, you can
use different price action clues such as trends, channels, or by analyzing
swing tops and bottoms.

Trading Supply and Demand with Price Action Trade

Management

Now let’s apply the guidelines above into a Supply and Demand trading
example.

We have a zoomed out picture of the H1 GBP/USD chart. At the bottom left
corner we see a supply and demand zone. The demand zone is marked with
blue and the supply zone is indicated with magenta. See that the price
action creates the demand zone after a previous decrease. The price
bounces several times from the demand zone, and we would have had
several opportunities to enter the trade.

We assume that the demand zone will trigger new long orders, which will
push the price upwards. The stop loss order should be placed below the
demand zone as shown on the image.

Notice as the price increases from the demand zone, that it eventually
reaches the nearest supply zone above. However, the price action breaks the
level with high momentum cluing us in that the level is not strong, and that
the GBP/USD might extend its bullish run. For this reason the trade could be
held on the assumption that the increase will continue.
This is exactly what happens. The price initiates a new rally. On the way up
we see increasing tops and increasing bottoms, which con rms that the
GBP/USD is in a strong bullish trend. The increase continues for 1 week. A
bearish attitude is demonstrated afterwards. The red bearish channel on the
chart shows decreasing tops and decreasing bottoms. This is a strong
indication that the bullish trend is most likely nished and that a bearish
trend might ensue. Therefore, it would be a good option to exit the trade on
the second descending bottom on the chart after the creation of the two
descending tops. Now let’s demonstrate the opposite scenario, a supply side
trading example:

This daily chart of the USD/JPY above shows a trade example with a supply
zone.

The two small blue arrows on the chart show the creation of the rst two
tops in the supply zone. We will look for Short trades that interact with that
level.

The USD/JPY could be sold after the bounce as shown with the rst green
arrow on the chart. The price starts decreasing afterwards. Soon after, a
swing low is created and we see a sharp price move to the upside. This area
subsequently forms a solid demand zone on the chart.

The price returns to the supply zone for a re-test afterwards. See that the
USD/JPY bounces sharply in the bearish direction. This creates another short
opportunity on the chart. The pair could be sold again after the bounce from
the level. After the price decreases, it reaches the magenta demand level on
the chart, creating another bounce. The second short trade could be closed
when you recognize the bounce from the magenta demand line.
The price returns to the supply zone and bounces again downwards. This
leads to a new price decrease. However, this time the price action creates a
strong market gap down and almost goes through the already established
demand zone, meaning that the bearish force is stronger than usual. In this
case you would have had a suf cient reason to hold the trade on the
assumption that the selling pressure has taken over, and the pair is entering
a bearish trend.
We use the big bearish yellow trend line to measure the intensity of the
downwards move. Then we hold the trade until the price action breaks the
yellow bearish trend line. The last red arrow shows the moment when price
breaks thru the trend line to the upside, which would be a valid signal that
the trade needs to be closed.
The stop loss orders for the three short trades are indicated with the red
horizontal lines above the supply zone.