Part-time Trading - Part 4.3

Continuation to Candlestick Formation:
As I told you before we are only interested in the candlestick formation that happen in the support or resistance line. So it is very important to draw the support / resistance line in correct place. Please click here to read again about Support / Resistance and here to know how to draw them. Please remember these support and resistance lines are decision taking levels are very import. As traders we just cannot ignore them at all. Traders around the world are looking at these support / resistance and accept the price to re-test the level for continuation or breakout. So any signal we get around that support / resistance is very significant. The direction of the trade is also important here. Remember the direction of trade doesn't depend on us. We must wait for the market reaction to trade and we are going to trade only on the direction of the market.

I again repeat, we are going to trade in the directing of market, depending on the price patterns around the support / resistance either to continuation or reversal .


Reversal Candlestick Formation:

As discussed before we are going to look for reversal opportunities only around Support / Resistance. Now look at the above picture carefully and these are the candlestick patters we are going to look before we place our trades. For the learning purpose we consider the line I have drawn as the resistance line drawn in monthly time frame (Please remember that this line can be a horizontal line/ diagonal line (trend line)/ Fibonacci lines / support or resistance line and we can use daily or weekly time frame also). So here if the price moves around the S/R levels and if we see any (not all) of the above candle stick formations (railway tracks / hammer / doji / outside bar / inside bar) then we are going to look for a bounce (reversal).


Here we are going to wait the candle to close before we place our trades. By taking the above trading example, if we get one of the formations, we are going to place a sell order. Here we took the example of monthly chart, so we are going to wait for the monthly candle to close at the end of the month and then we place entry order. Say for example we get a hammer on our S/R level, then when the candle closes, we take a sell order at 5 pips below the low of the hammer and the stop loss will be at the 5 pips above the highest point of the candle (hammer). The profit taking will depend on the upcoming bar (we are going to close our trade at the end of the next candle stick). We are going to see this with example in the coming post (I know it is a bit confusing).


Railway Tracks:
Railway tracks which are also called as tweezers consisting of two candlesticks of almost same length but different colours. Sometimes they may even break the line move little upwards / downwards (also called fake breakouts). Some times they may not touch the line but come as near as possible to the line. 


Hammer/ pin bar:
Hammer is a candlestick pattern made up of single candle with long wick and short body. We must remember that these hammers or pin bars or inverted hammers doesn't always touch the S/R line. Sometimes they may even break the line move little upwards / downwards (also called fake breakouts). Some times they may not touch the line but come as near as possible to the line. Also note that the longer the wick the better and the colour of the hammer doesn't matter. It may be green or red.)


Outside Bar / Inside bar:
This is the candlestick formation consisting of two (rarely 3) candlesticks where one candlestick will be smaller than the other and the hight of the candlestick will be inside or outside the other candle (look at the picture). In the outside bar, the second candlestick will be close higher (total length will be bigger) than the previous candle and in inside bar, the second candle will be smaller than the previous candle.


Doji Spinning top:
Spinning top is a candlestick formation where the body and the wicks are very small in size and Doji just looks like a plus sign.


In the future post we are going to see some examples of these reversal formations. For the older posts if you have missed any please click here or go to PipBase
Good luck.