Part 16 Technical Analysis – Candlesticks Formations II.

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Part 16: Technical Analysis – Candlesticks Formations II.

In the previous episode of technical analysis (Part 10: Technical Analysis – Candle Formations), we described candlesticks formations, for example pin bar, and three line strike. Now it’s time to show you other candle formations. But first we need a bit of theory.

Trading candle formations

Trading candle formations is a type of trading using price action. That means trading strictly according to the price chart, i.e. without indicators. In this case we are using only price changes, candle shapes and candle positions – candle formations . When trading candle formations we also usually use trend lines – support and resistance lines.

Traders of price action consider that this is all that is needed for trading. According to them there is no need to use any indicators or other instruments, because they always just reflect what happened in the market in the past. Therefore they are useless and they only distract you from the real price and are unable to predict the future.

As a signal to open a trade position, we can use different candle formations from a chart (pattern and formations). We can map the actual situation on the market by price action analysis and by identifying quality patterns. Such pattern may provide us with a signal to open a position. If at the same time there are also other factors of the market which are in our favor, we can be sure that it is a very good quality signal.

Various candle formations

A few of formations that are formed during downtrend

There are dozens, maybe even hundreds of various candlesticks formations. I would even say that most of them are nonsense that people invented just to make something up. See the picture above, which summarizes a little what everything you can find in a chart. However, we will focus on the candle formations that make some sense.

Morning Star and Evening Star formation

One of the formations which I love, is called Morning star. The morning star formation is formed during a downtrend. Its exact opposite – Evening star – is formed during an uptrend. Whether it’s one or the other formation, it is always a signal that the price is going to turn.

How can you recognize these formations?

  • For the Morning Star:
    • 1. The downtrend is obvious.
    • 2. The body of the first candle is declining and it is relatively long. It is a continuation of the current downtrend.
    • 3. The third candle shows whether the price started to rise. This candle should close over the half of the first candle.
  • For the Evening Star:
    • 1. The uptrend is obvious.
    • 2. The body of the first candle is rising and it is continuation of the current uptrend.
    • 3- The third candle shows whether the price turned. This candle should close under the half of the first candle.

I’m not going to describe it too much, we can directly check out some examples in the charts and in the real world of trading. BTW if you want a cool article about it, check out candle formations strategies.

Morning Star and Evening Star candle formations

In both examples above you can see lines that help to distinguish when the trend reversal could happen. These lines are of course part of out successful strategy BERSI Scalp.

Do you want to know more about that strategy? Go to: http://bersistrategy.com.

Piercing Pattern formation

This formation can be used for the confirmation of the rotation. Although this is initially the downtrend reversal pattern, it is possible to use this candle formation also vice versa. Piercing pattern formation is very well shown in the video below, but for any case I am also going to describe it.

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A video by IQ Option

  • After a series of several (at least 5) consecutive candles going in the same direction we will focus on a series of candles going in the opposite direction. If in the second series we find at least three candles going in the opposite direction, we can invest on the rotation.
  • This formation is even stronger when the price bounces back from, for example, a supporting line. On the other side you have to be careful that it is not just a throwback.

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Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

One Response to “Part 16: Technical Analysis – Candlesticks Formations II.”

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Part 9: Technical Analysis – Price formations

Today, we’ll talk about price formations that can be traded quite easily. There is a whole bunch of them and even though they do not appear as frequent as supports and resistances, it’s good to know something about them, so we don’t get caught of guard. These formations appear on all asset types, such as commodities or forex.

Formations that we’ll talk about are: double bottom, double top and head and shoulders. So, let’s get straight to it.

Double bottom / Double top

This might possibly be the most famous formation that can be traded several times a day (using an M5 timeframe). The formation double top means that the price simply bounces twice (or more times) from one single resistance level. The general rule applies that the more bounces the price makes, the stronger the signal towards the trade and to a trend reversal.

A PUT trade can be entered right when the bounce occurs. But that’s a different approach than what we will talk about now. The thing is that when the price reaches the peak and bounces off of the resistance, it brakes the former bottom and will then continue in its direction.

The same goes for the double bottom, but vice versa. (See Figure No 1)

  • Support line developed in point A
  • Resistance line developed in point C
  • A second peak reached in point B
  • Point D shows us the break of the resistance, followed by the confirmation of the break, we invest on the increase of the price – binary option call
  • The price continued to increase and our investment has finished profitably

When this formation occurs, it is likely that the trend will be reversed. Double bottom changes the bearish trend to bullish and double top, on the other hand, reverses a bullish trend.

Head and Shoulders Formation

Another formation is called head and shoulder, but it’s not that common. It looks exactly as it is called. See figure No 2.

The black line indicates the price. We are looking for a peak, then a little higher peak and if the next peak doesn’t reach the same price as the previous one and the price brakes the last bottom, we invest on the decrease of the price. Preview in figure No 3.

  • First peak (our first shoulder) developed in point A
  • First bottom, higher than the previous one developed in point B
  • The highest top (our head) developed in point C
  • Second bottom in point D
  • Point E shows another bottom, a little higher than the previous one (our second shoulder).
  • When the price, in point F, got under the level of the previous bottom (D) we invest on the decrease of the price – binary option put.

This formation changed the trend as well, even though it’s not a rule. You can also find it the other way around – “upside down”.

I hope that I’ve taught you something new today and that all your price formation trades will go according to the plan. If you have any questions, feel free to send them down in the comment section below. I read them daily!

Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Technical Analysis

Technical Analysis is a discipline for forecasting/predicting the direction of prices through the study of past market data, primarily price …

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Technical Analysis is a discipline for forecasting/predicting the direction of prices through the study of past market data, primarily price and volume.

“Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends”. Technical analysis is widely used among stock brokers, traders, financial analysts and financial professionals.

Introduction – What is Technical Analysis?

    • Definition
    • Main factors in technical analysis
    • Advantages
    • Criticisms
    • Types of Charts
    • Long-term vs. short-term
  • Background & Basics
    • Technical Analysis as an Integral part of Market Analysis.
    • History of Technical Analysis
  • Constructing and interpreting charts
    • Tools- The construction of four types of Charts
    • Bar chart
    • Line chart
    • Point & figure chart
    • Candlesticks chart
  • What to look for on charts
    • Trends
    • Support & Resistance levels
    • Moving Average
    • PGaps
    • Volume
    • Comparative Relative Strength
  • Trend analysis
    • Support and Resistance Lines
    • Trends
    • Direction
    • Duration
    • Trend lines
    • Channel lines
    • Breakout trend lines: rules of confirmation
  • Oscillators
    • Definition
    • Role
    • Relationship with Underlying Instrument
    • In-gear
    • Bullish divergence
    • Bearish divergence
    • Types
    • Momentum
    • Rate of Change
    • Relative Strength Index
    • Stochastic
    • Larry Williams %R
    • MACD
    • Moving Average Oscillator
  • Moving averages
    • Definition
    • Benefits
    • Types
    • Number of moving averages
    • Duration
    • Double crossover
    • Japanese crosses
    • Triple crossovers
    • Envelope model
    • Bollinger Bands
  • Technical theories
    • Dow Theory Theories
    • Elliott Wave Principles
    • Fibonacci Sequence
    • Gann Analysis
    • Cycle Analysis
  • Technical analysis indicators
    • Relative strength index
    • Rate of change index (ROC)
    • Stochastic (%K D)
    • Larry William %R
    • Moving average convergence & divergence (MACD)
    • MACD Histogram
    • Bollinger band
    • Real time computer presentation
  • SENTIMENTAL INDICATORS
    • Put/Call ratio
    • Bull/bear Indicators
    • Insider activity
    • CBOE Volatility index
  • Ratio Analysis
    • Percentages: Dow, Fibonacci and Gann
    • Fans
    • Arcs
    • Retracements vs. Extensions
  • Chart formations
    • Trend reversal formations
      • Head and Shoulders
      • Double Tops and Double Bottoms
      • Triple Tops and Triple Bottoms
      • V-tops (spikes)
      • Rounded Tops and Rounded Bottoms (saucers)
    • Trend continuation formation
      • Flags
      • Pennant
      • Triangles
      • Wedges
  • STOP LOSS
    • What is stop loss
    • How to set stop loss
    • Stop loss through ATR indicator
  • Why interest rate affect the market
    • Relationship between Interest rate change & stock Price change
    • Interest Rate Risk on market
  • Volume and open interest
    • Volume & open interest With Support & résistance
    • Using open interest to find bull & bear signal
  • Intermarket Technical Analysis
    • Inter market relation using Technical concepts
    • Inter market Analysis -Gold, crude, silver, DJIA, Nifty, Dollar, International Market

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