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Showing posts with label Price Action Candlestick Patterns. Show all posts
Showing posts with label Price Action Candlestick Patterns. Show all posts

Thursday, 11 March 2021

Price Action Candlestick Patterns

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 The final set of price action patterns we’re going to to be looking at today are price action candlestick patterns. There are lots of candlestick patterns out there, but I just want to focus on the two which I think are most important for price action traders to understand.

Pin Bar/Hammer Candlestick

The pin bar is a single candle pattern which can be found forming across all currencies and all time-frames in the market. It falls into the category of price action reversal patterns due the fact it’s appearance is supposed to be a signal a reversal is going to occur. Although it must be said that very few pin bars actually cause large reversals to take place in the market, (I’ll explain why in a minute).

Like most price action patterns the pin bar comes in two varieties:

The bullish pin bar, which signals a reversal to the upside may be about to take place, and the bearish pin bar, which is a sign a reversal to the downside is probably going to occur.

image of bullish pin bars on 1hour chart of eur/usd Here’s an image of some bullish pin bars which formed on the 1 hour chart of EUR/USD

You can see that the vast majority of these bullish pins did cause the market to reverse once they had formed, but they didn’t all cause it to reverse for the same duration of time. Some caused large upswings to take place whilst others only created small retracements.

image of bearish pin bars on 1hour chart of eur/usd In this image we can see some bearish pin bars that formed on the 1 hour chart of USD/JPY.

Again, you can see that the pin bars which formed on here also caused reversals of varying sizes to take place. The reason why pin bars cause different sized reversals to occur, is because of the action that caused the pin bar to form in the first place. Pin bars and all the other candlesticks you see forming on your charts, form as a result of traders making decisions in regards to the market price. Pin bars happen to form exclusively from the bank traders either placing trades because they want to make the market reverse, or from taking profits off trades which they’ve already got placed.

The reversal created by the pin bar which has formed as a result of the bank traders taking profits off their trades, is naturally much smaller than the reversal caused by the pin which has formed from the bank traders placing trades to make the market reverse. It’s obvious why this is, I mean if you took some profits off a trade you would want the market to continue moving in the direction to which your trade had been placed so you could make more money from the trade. The bank traders want the same to happen when they cause a pin bar to form from taking profits off their own trades, which is why the reversal caused by some pin bars forming are much smaller than the reversals caused by other pins forming.

Bullish and bearish pin bars are really good reversal patterns to watch out for if you’re a price action trader, but they must be traded in the right way and you must understand why they form in the market. Most of the books and guides out there on pin bars do not teach traders what causes them to form, when it’s knowing what causes them to form that will allow you to determine which pins have a high probability of working out successfully.

If you want to learn more about what causes pin bars to form in the market, go and check out some of the other pin bar articles I have available on the site, or take a look at the Pin Bars Uncovered book found on the cool stuff page, as this is a book dedicated solely to helping traders understand why pin bars form in the market and how to trade them profitably.

The Definite Guide To Trading Pin Bars

Engulfing Candlesticks

The other really important candlestick pattern I think price action traders need to have knowledge on is the engulfing candlestick. Like the pin bar the engulfing candle is a reversal pattern, which means that a reversal is supposed to take place immediately after you see one form in the market. Unlike the pin bar the engulfing candlestick is a two bar reversal pattern, a pattern which requires there to be two candlesticks present in order for it’s formation to be complete.

image of bearish engulfing candlestick Here’s an example of a bearish engulfing candle which caused a reversal to occur on EUR/USD.

The formation of a bearish engulf is always a signal that a reversal to the downside is about to take place. The pattern itself consists of two candlesticks. The bearish engulfing candlestick itself, which I’ve marked with an arrow, and the bullish candlestick that formed an hour before. The bullish candle is first candle required in the bearish engulf setup. This is the candlestick which the market will always engulf with a bearish candle immediately after it’s formation. In order for a bearish engulfing candle to form, a bullish candle must have formed immediately prior. You can’t have a bearish candlestick engulfing another bearish candle, it has t0 be a bullish candle in order for it to be a bearish engulf.

image of bullish engulfing candlestick Here you can see an image of a bullish engulfing setup which caused a reversal on EUR/USD.

Bullish engulfing candlesticks are of course the opposite to bearish engulfing candles, which means their appearance is a sign the market is going to reverse to the upside. Like the bearish engulfing candle they are also a two bar pattern, but instead of the first candle in the pattern being a bullish candlestick, like we see with the bearish engulfing formation, the first candle in a bullish engulfing setup will always engulf a bearish candle. A bullish engulfing candle cannot engulf another bullish candle, it can only engulf bearish candles.

Engulfing candlesticks are best used as signals to enter trades at pre-existing points where you expect the market to reverse, such as support and resistance levels or supply and demand zones. They can be traded on their own without any other confirming factors being present, but in my opinion they don’t tend to work out as well as pin bars do.

Summary

Whilst the patterns I’ve talked about in this article aren’t all the price action patterns that can form in the market, they are the ones which are the most important, and you should really take some time out to study these patterns on your own. It would be a good idea to go back on your charts and look for times when these patterns have appeared in the market and watch to see how they form and how they cause a continuation or reversal to take place. By doing this you’ll be able to not only recognize patterns more easily, but you’ll also find it easier to determine when they are about to cause a reversal or continuation to occur, which will allow you to get trades placed at more profitable prices.

Sunday, 15 April 2018

Price Action Candlestick Patterns

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In this lesson, we’re going to cover three of my favorite Forex candlestick patterns. I’m going to assume that you’re familiar with Japanese candlesticks. If not, you may want to visit this post and then come right back.
By the time you finish this lesson, you’ll know how to identify these formations, what makes them so lucrative as well as the price structures to stay away from.
I’ll be using the terms “candlestick” and “bar” interchangeably throughout this lesson. A pin bar or an inside bar can technically be called a pin candlestick and inside candlestick, but these aren’t nearly as common.
Let’s dig in!

1. The Pin Bar and Its Ability to Signal Turning Points

Let’s begin with my favorite candlestick called a pin bar. Like most formations, these can form as either a bullish or bearish signal.
So what exactly qualifies as a pin bar?
Let’s take a look…
Video Thumbnail
I hope the video above cleared up any questions you may have had about the pin bar.
Here’s an illustration of the characteristics we just discussed.
pin-bar-candlestick-pattern
Before we get into why these are so powerful, let’s first break down the components of the structure.
The tail of a pin bar is also called a “wick” or “shadow” and represents the most critical element of the pattern. As a general rule, the tail should make up at least two-thirds of the entire pin bar. Notice how the tail on the two pin bars in the illustration above are much more pronounced than the rest of the structure.
Next is the body. The body represents the open and close of a pin bar and can vary in size. However, there shouldn’t be much space between the open and close.
The first rule about the tail should help keep you in line. After all, if the tail is at least two-thirds of the candlestick, then the body should be relatively small.
The nose of the pin bar, which is sometimes nonexistent, is important only as it relates to the tail and body. If the tail follows our rule of being at least 2/3 of the entire pin bar, and the open and close are close together, then the nose shouldn’t be a make-or-break characteristic.
Just know that the nose should be as small as possible, much like the image above.

Why do I trade it?

When it comes to Forex candlestick patterns, the pin bar is by far my favorite.
Here’s why…
  1. It’s easy to spot when you have your chart setup to trade Forex price action
  2. It provides a favorable place to hide your stop loss
  3. The pin bar can be extremely profitable when correctly utilized
  4. They are effective on both the daily and 4-hour time frames
Now that you have a firm grasp on the characteristics to look for let’s get into a couple of examples.
The first is a bullish pin bar that occurred on the NZDJPY daily chart.
NZDJPY bullish pin bar on the daily chart
Notice how after an extended move lower, the NZDJPY found support and subsequently formed a bullish pin bar.
This pattern triggered a sharp move higher back to previous swing lows, which acted as resistance.
Next up is a bearish pin bar that occurred on the EURUSD daily time frame.
pin-bar-candlestick-pattern
In this case, the EURUSD had carved out an ascending channel. On the second retest of resistance, sellers came out in force and eventually formed a bearish pin bar.
This particular candlestick formation triggered a 400 pip drop over the next eighteen sessions.
I wrote a more detailed lesson on the pin bar where I get into what makes a tradable setup as well as where to place your stop loss and target.

2. Nothing Says Continuation Like the Inside Bar

The inside bar is one of the more misinterpreted Forex candlestick patterns simply because they aren’t hard to find. This observation is especially true for those trading anything less than the daily charts.
Take a peek at the video below where I explain the characteristics of the inside bar and an easy way to determine if one is bullish or bearish.
Video Thumbnail
 
To recap, here’s an illustration showing the attributes of an inside bar:
inside-bar-candlestick-pattern
The inside bar’s range (high to low) should be engulfed entirely by the previous bar’s range, also called the “mother bar.”
Another way of saying it is that the mother bar should completely engulf the range of the inside bar.

So what makes the inside bar so lucrative?

When it comes to Forex candlestick patterns, the inside bar is my second favorite pattern to trade.
Here’s why…
  1. It can act as a profitable continuation pattern if it occurs during a strong trend
  2. It provides a favorable place to hide a stop loss
  3. A tradable inside bar doesn’t occur often, but when it does it can be a highly effective Forex candlestick pattern
Here is an excellent example of the inside bar in action:
inside-bar-candlestick
Notice how the inside bar in the chart above formed during a strong uptrend. An established trend is a requirement for trading this particular candlestick pattern.
The reason for this is that the inside bar is nothing more than consolidation. So we have a strong trend followed by consolidation which leads to a breakout in the prevailing direction.
Pretty simple stuff, right?
The next chart shows two bearish inside bars that formed on the EURUSD daily chart. Note that the pair had been in a downtrend for several months, therefore these are bearish continuation patterns.
bearish-inside-bar
You could make the case that the first signal in the chart above was also a pin bar, and I would agree. The combined rejection of former support and consolidation made for an incredibly profitable trade setup.
To learn more about inside bars, including which ones to trade and which ones to avoid, check out my detailed lesson on trading the inside bar pattern.

3. The Misunderstood Engulfing Bar Reversal

Last but not least is the engulfing candlestick. Unlike the inside bar that we just studied, this formation most often signals a reversal in the market.
Why do I call it a misunderstood pattern?
Because it takes more than an engulfing candle to warrant a position. To be considered tradable, an engulfing candle must develop at a key support or resistance level and after an extended move up or down.
Here’s a brief video that explains what I look for…
Video Thumbnail
While the video above only addresses the bearish engulfing candle, the same rules apply for its inverse, the bullish engulfing.
For it to be profitable, an engulfing pattern must form at a swing high or low. Only then can it be used to formulate a trade idea.
engulfing-candlestick-pattern
Notice how the range of the engulfing bar completely engulfs the previous bar’s range. Hence the name, this is the most prominent and significant feature of this pattern. It’s also what makes it such a lucrative signal.
While the engulfing bar pattern is my third favorite in this lineup, it can be extremely telling if properly utilized.
Here are a few things to keep in mind when trading them…
  1. They typically signal a forthcoming reversal
  2. These patterns should only be utilized on the daily time frame and after an extended move up or down
  3. If used as an entry signal, your stop loss should be placed above the engulfing bar high for a bearish pattern and below the engulfing bar low for a bullish pattern
  4. For a higher probability setup, always combine them with other favorable methods or techniques.
The bearish engulfing pattern below occurred on the AUDUSD daily chart.
In fact, there were two back-to-back formations at key resistance.
bearish-engulfing-candlestick
As you can see, the pair had carved out a wedge pattern. The two bearish signals formed at resistance, creating two profitable opportunities.
Know that the first candlestick in the chart above is also a bearish pin bar or at the very least a bearish rejection. It’s rare, but these two patterns can sometimes overlap.
Always remember that a bullish engulfing pattern at a swing low is a sign of potential strength. It signals that the current downward momentum is likely coming to an end.
Alternatively, a bearish engulfing pattern at a swing high is a sign of potential weakness. If you see one form in this manner, the chances are good that an increase in selling pressure is on its way.
Last but certainly not least, both candlestick patterns must form at a key level to be tradable. Otherwise, you may find yourself trading a lot of false positives.

Final Words

Whether you trade using raw price action or some other means of identifying favorable setups, the three candlestick patterns above will surely improve your trading.
As lucrative as these formations can be, always remember that there are never any guarantees. Just like any other Forex trading strategy, the three above can and do fail, so always protect yourself.
Last but not least, the pin bar, inside bar and engulfing pattern are most useful when combined with other confluence factors. By doing this, you greatly increase the odds of a successful trade.