Candlestick chart trading is extremely popular, but confusing to some people and for good reason.
If you’ve already looked at Part 1, please scroll about half way down the page to go to Part 2.
It’s been overcomplicated. When you look at Japanese Candlestick Patterns from a logical perspective, they’re actually quite easy to understand, and therefore remember.
This video and article walks you through the process of making Candlestick chart trading second nature for you.
Enjoy the video and please leave your comments below.
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VIDEO TEXT:
Welcome to this video on Candlestick Chart trading. This one is probably the most controversial videos that I’ve done to date. So hang on, fasten your seatbelts, some of you aren’t going to like this.
I do candlestick chart trading but I’ve got to give you a big big warning here. I know they’re really popular and like I said, I do trade them myself. But let’s face facts. The Japanese created these back in about 17th century, trading rice in their van down by the river. Sorry, little Saturday Night Live reference there. Okay, some of you will get that, some of you won’t. But basically that’s true. The Japanese created this charting technical analysis technique when they were trading rice back in the 17th century.
Things have changed since then my friend. The markets are almost all electronic. By the way, I’ve been to the Tokyo’s stock exchange. It’s like a library in there. It’s so quiet. There’s no people. The only people that are in there, the ones that are just kind of watching the computer systems. So even the Japanese have completely changed their trading. In fact they’re ahead of us. They modeled theirs after the NASDAQ, not the New York Stock Exchange.
So we’ve got dark pools today. We’ve got flash traders, high frequency traders, algo trading. Over half of the shares traded at the New York Stock Exchange, every single day are done by computers, not by human beings. So can we really use a 17th century technique today?
Well the answer is yes and no. I do candlestick chart trading but in a very, very limited way. And only with other powerful things. I don’t use them by themselves and in fact most of the people who do specialize in teaching candlestick patterns will tell you not to use them in isolation. And they’re 100% correct.
ENGULFING CANDLESTICK CHART TRADING PATTERN
Today let’s talk about engulfing patterns. Engulfing patterns have a market logic to them and the only things that I will trade are things that have what I call a “market logic.” An engulfing candlestick pattern means simply that the second bar there, the red bar, completely engulfs the previous bar, the green bar.
Now there’s a couple ways that you can define the word “engulf.” The most conservative way and the best pattern is when the real body, that’s the red part of that candle engulfs the entire body of the previous one. In other words, this is the open and that’s the close, the red part of it. And then at the very top, we’ve what’s called the wicks or the shadows. That’s the high and that’s the low of the bar.
The best patterns are the ones where the red part between the open and the close completely engulfs the bar before. Meaning it engulfs the high to the low of the bar. That’s the most conservative approach to an engulfing bar.
TEACHING AN OLD CANDLESTICK PATTERN NEW TRICKS
Now I don’t personally require that it does that. Because let me tell you, you aren’t going to find that very often. You see them a little more in daily charts, but if you’re an day trader, you don’t see them very often, except right at the open because of the massive volatility at the open. So I don’t require that. Let me show you what I look for.
What I look for is simply a pattern like this right here, where the real body of the green bar engulfs the real body of the red bar. You’ll notice the high of the green bar is not above the high, and not even the close of the green bar is above the high of the bar before. They’re both lower, and that’s okay to me.
What I’m looking for is the dominant value the market found during that period of time which is between the open and the close. The highs and lows, those are the extremes that the market actually rejected those values. So that’s number 1. You look for the engulfing bar. But now there’s one more thing we need to look for, so let’s go to that.
THE DEVIL’S IN THE DETAILS
So the next issue here is, let’s look at these two bars right here. Now the real body of the red bars engulfing the real body of the green bar. But look how long the wick, where the shadow is on the bottom. This is a bearish bar, and yet it did not close near the low. It actually closed pretty close to the 50% range, a little below that.
What that means is that yes even though the real body of that bar engulfed the real bar body of the previous bar, the close of the bar was not near the low. I want to see it in the bottom 20% of that bar, the range of that bar. Otherwise it’s not a strong bearish bar. And therefore I do not count it. So that is the 2nd issue. Now let’s go on and look at a 3rd issue that you must consider.
Okay so here is the 3rd issue and we look at these 2 bars here. And you’ll notice how, oh my drawing is not very good there. Let me redraw that. But you notice how the green bar is really long. Real wide range from low to high. Now first of all it is closing near the high so that’s good within the top 20% of the range of the bar. Now the real body engulfs the previous bar’s real body.
CANDLESTICK CHART TRADING FEELS HOME ON THE “RANGE”
The range of the bar is very important. You’ll see, so for example we get other bars that are engulfing. Well here is one, we can even talk about this. But that’s not a great signal because those 2 bars are very narrow range bars compared to the rest. So when you talk about narrow range or wide range, we are talking about relative to previous bars. I want to see that range be at least 20% greater than the average of the last 20 bars on the chart.
Here’s another example of candlestick chart trading. We get an engulfing bearish pattern. But look how narrow range they are. So whenever you get narrow range bars, that just implies neutrality. There is not strength in one direction or another, as opposed to here, we have got another engulfing pattern. But see it made a higher high after that. But then after this, the dominant energy is very strong to the downside, it’s a wider range bar, and the market does continue to go down. So look at the range of the bars.
COMBINING ENGULFING BARS WITH LOW VOLATILITY FOR BETTER TRADES
Now number 4, you know I am going to give you two bonus ones as well. So number 4 is that you want the entry or this pattern to come at the beginning of a new trend or coming out of consolidation, out of consolidations. So in other words if I got a bullish pattern, a bullish engulfing pattern up here, I won’t be too interested. But see here, we’ve been coming down, and to get a new impulse move up. Yes, that’s what I want.
That goes with the principle of the trend is your friend until the end. So I don’t want to trade a bullish pattern and in an extended bullish trend. I want to catch these patterns early and either consolidation pattern or at the end of a bearish trend to the downside. So same thing here. We had basically kind of 1, 2, 3 4, 5 swing pattern. It’s not necessarily a wave pattern, just a swing pattern. And then we get a bearish pattern. So that’s a little more interesting for me.
Well this video got a little longer then I thought. So we are going to do a part 2 to this, and in that one (KEEP SCROLLING DOWN BELOW THIS ARTICLE FOR PART 2 WHICH IS NOW FINISHED) I am going to share with you some other things that you need before you can effectively do candlestick chart trading.
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Candlestick Chart Trading – What Works Today, Part 2
This is a followup to the Part 2 (above) of this series containing a video and article that takes you through the process of making Japanese candlestick chart trading second nature for you.
Enjoy the video and please leave your comments below.
PLEASE “PAY IT FORWARD” BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons above, or at the very bottom of this article.
VIDEO TEXT:
Welcome to this second video on Candlestick Chart trading.
Today we’re going to talk about a different candlestick chart trading pattern and this is not really a traditional candlestick pattern, I just call it a spike top or a spike bottom reversal candlestick pattern. It’s very similar to those of you who are familiar with the traditional Japanese candlesticks to the shooting star or to the hammer. But I just create a little more leverage around it. I’m not quite as strict in my rules. We’re looking for the logic, the market logic of the pattern. So here it is.
CANDLESTICK CHART TRADING RULE #1
First of all, this is essentially what it looks like right there. It’s got to be a spike top bar. And the thing that we’re looking at is that the market opens here and then it tests these price levels. So there’s bidding, there’s asking, there’s some buying, there’s some selling, but by the time that bar closes, it comes all the way back down here and the bar closes at the same price level it started.
Now before spike top or spike bottom bars, sometimes there’s dojos like this. Other times they have narrow real bodies. So doesn’t have to open and close at the exact same place. But it does have to open and close near the bottom of the bar. So that’s one of the keys. Rule 1, is that it has to both open and close in the bottom 20% of the range of the bar.
The logic is that the market found value here. It opened where it closed from the last bar. traditionally in a shooting star, it will gap up and consider it a higher probability trade if it gaps up at the open the next day. That happens more on daily charts than within intraday chart like this. But again I’m just, simplifying candlesticks. So they test all these prices up here and they reject them. In market profile terms, that is called a rejection of value.
So these prices from here to here. The market has tested them, and by the end of that bar, during that timeframe the market participants said, “we don’t think the market is that valuable” and that therefore is a bearish signal. Because these prices have been rejected and so it is considered a bearish pattern, and then the market goes down from there. So market’s always trying to establish what is a fair price for whatever market’s being traded. So when I talk about the term market logic that’s what I mean. How do markets people in an auction setting work? How do they logically work?
CANDLESTICK CHART TRADING RULE #2
Now another thing that is very helpful is rule number 2: the range of that bar is 20% greater than the range of the last 20 bars. So narrow range bars, we don’t want those.
For example, over here we go little narrow range bar, and that’s a spike top bar but it’s not really very significant because from the high to the low of the bar, didn’t really cover enough range for to reject enough price value, enough price levels. So it’s really meaningless, it’s really just a neutral bar. Anything that is a narrow range bar, I consider it to be a neutral bar.
CANDLESTICK CHART TRADING RULE #3
Another thing is in the context, here we have a spike top bar and, but look where it is. It’s already down here and this is the problem. So this is rule 3. Rule 3 is that we want it to be a cycle high or cycle low. And in this case it comes in the middle of a half cycle, from that cycle high to the cycle low. Therefore it’s not something that I would trade, because it is a bearish bar. It’s a bearish signal but it comes too late in the range of the half cycle. And I want to catch it at a cycle high or a cycle low.
By the way if you’re interested in my cycle indicator, if you don’t have one, you should have one. But if you don’t, then let me know. Send me an email at support@topdogtrading.com and I’ll be happy to send you information about how to get mine for free.
MORE EXAMPLES
So here’s just a couple more examples. There is another one, nice spike high bar. Here, and it puts in a cycle high. Spike low bar puts in a cycle low. Again it’s rejected these prices and it’s rejected these prices. And therefore that’s what makes it signaling high. Signaling a low.
Notice these are just short term signals. This is true in my opinion on all candlestick patterns. Sometimes people ask me well how long are these signals good for? And for me they are good for one half a cycle. Which is you can see is rather short term. That would be a cycle high, cycle low, cycle high, cycle low, cycle high, cycle low. They do not determine trend so the short term signals and trend by definition is always a long term signal.
There’s another one, big one. So now we got a real wide range one there. And again it’s rejected, tested all these prices and said nope, we can’t get enough buyers up there. None of people are buying to get enough traction going and therefore what happens, the market goes down.
Pay It Forward My Friend
PLEASE PAY IT FORWARD BY SHARING THIS VIDEO & ARTICLE ON FACEBOOK OR TWITTER by clicking one of the social media share buttons below.
Leave a comment below telling me what other information you’d like about what’s the best time frame for trading that you’d like me to teach in the future.
Also I am giving away one of my favorite day trading strategies that work today. Just fill out the yellow form at the top of the sidebar on the right. Once you do that, I’ll personally send you an email with first video.
For another excellent trading video, simply click here:
http://www.topdogtrading.com/stock-market-double-top-trading-chart-pattern/
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