The Candlestick Trading Bible, Study notes of Business Economics

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THE CANDLESTICK TRADING BIBLE ltt att THE CANDLESTICK TRADING BIBLE  2 THE CANDLESTICK TRADING BIBLE Content Introduction 4 Overview 6 History of Candlesticks 8 What is a Candlestick 11 Candlestick Patterns 14 The Engulfing Bar Candlestick 16 The Doji Candlestick Pattern 20 The Dragon Fly Doji Pattern 22 The Gravestone Doji Pattern 25 The Morning Star 28 The Evening Star Candlestick Pattern 31 The Hammer Candlestick Pattern 34 The Shooting Star Candlestick Pattern 37 The Harami Pattern 40 The Tweezers Tops and Bottoms 43 Candlestick Patterns Exercise 47 The Market Structure 51 How to Trade Trending Markets 54 Support and Resistance Levels 58 How to Draw Trendlines 61 The Ranging Market 63 Time Frames and Top Down Analysis 70 Trading Strategies and Tactics 79 The Pin Bar Candlestick Pattern Strategies 81 5 THE CANDLESTICK TRADING BIBLE The easy to follow strategies detailed in this work will provide you with profit making techniques that can be quickly learned. More importantly, learning the principals of market psychology underlying the candlestick methodology will change your overall trading psych forever. The Candlestick trading bible has already proven itself. Fortunes have been made using the Japanese candlestick strategies. I congratulate you on taking the first step in your trading education, you are on the right path to become a better trader. However, this is actually just the beginning of your trading career, after finishing this eBook, the real work begins. Don’t read this eBook very fast, this is not a novel, you should take your time to understand all the concepts i discussed, take your notes, and go back from time to time to review the strategies i shared with you. Remember, this is an educational work that will teach you professional methods on how to make money trading financial markets. If you got the skills that i shared with you here, you will change completely your life and the life of people around you. 6 THE CANDLESTICK TRADING BIBLE Overview The eBook is divided into the following sections: 1-Candlesticks Anatomy Just as humans, candlesticks have different body sizes, and when it comes to trading, it’s important to check out the bodies of candlesticks and understand the psychology behind it. that’s what you will learn in this section. 2-Candlestick patterns Candlestick patterns are an integral part of technical analysis, candlestick patterns emerge because human actions and reactions are patterned and constantly repeated. In this section you will learn how to recognize the most important candlestick patterns, the psychology behind it’s formation, and what do they indicate when they form in the market. 3-The Market structure In this section, you will learn how to identify trending markets, ranging markets, and choppy markets. You will learn how these markets move and how to trade them professionally. You will also learn how to draw support and resistance, and trendlines. 4-Time frames and top down analysis Multiple time frame analysis is very important for you as a price action trader, in this section you will learn how to analyze the market using the top down analysis approach. 5-Trading strategies and tactics In this section you will learn how trade the market using four price action trading strategies: -The pin bar strategy 7 THE CANDLESTICK TRADING BIBLE -The engulfing bar strategy -The inside bar strategy -The inside bar false breakout strategy -Trades examples I highly recommend you to master the previous sections before jumping to this section, because if you don’t master the basics, you will not be able to use these strategies as effective as it would be. In this section you will learn how to identify high probability setups in the market, and how to use these candlestick patterns in trending markets and ranging markets to maximize your profits. 6-Money management In this section, you will learn how to create a money management and risk control plan that will allow you to protect your trading capital and become consistently profitable. 10 THE CANDLESTICK TRADING BIBLE that bar chart generate with the added clarity and additional signals generated by candlesticks. -Candlesticks are used by most professional traders, banks, and hedge funds, these guys trade millions of dollars every day, they can move the market whenever they want. They can take your money easily if you don’t understand the game. Even if you can trade one hundred thousand dollars trading account, you can’t move the market; you can’t control what is going in the market. Using candlestick patterns will help you understand what the big boys are doing, and will show you when to enter, when to exit, and when to stay away from the market. 11 THE CANDLESTICK TRADING BIBLE What is a candlestick? Japanese candlesticks are formed using the open, high, low and close of the chosen time frame. -If the close is above the open, we can say that the candlestick is bullish which means that the market is rising in this period of time. Bullish candlesticks are always displayed as white candlestick. The most trading platform use white color to refer to bullish candlesticks. But the color doesn’t matter, you can use whatever color you want. The most important is the open price and the close price. -If the close is below the open, we can say that the candlestick is bearish which indicates that the market is falling in this session. Bearish candles are always displayed as black candlesticks. But this is not a rule. 12 THE CANDLESTICK TRADING BIBLE You can find different colors used to differentiate between bullish and bearish candlesticks. -The filled part of the candlestick is called the real body. -The thin lines poking above and below the body are called shadows. -The top of the upper shadow is the high -The bottom of the lower shadow is the low. Candlestick body sizes: Candlesticks have different body sizes: Long bodies refer to strong buying or selling pressure, if there is a candlestick in which the close is above the open with a long body, this indicates that buyers are stronger and they are taking control of the market during this period of time. Conversely, if there is a bearish candlestick in which the open is above the close with a long body, this means that the selling pressure controls the market during this chosen time frame. -Short and small bodies indicate a little buying or selling activity. 15 THE CANDLESTICK TRADING BIBLE skill of identifying easily any pattern you find in the market and understand what it tells you to do next. If you can get this skill, you will be ready to understand and master the trading strategies and tactics that i’m going to teach you in the next chapters. 16 THE CANDLESTICK TRADING BIBLE The engulfing bar candlestick pattern The Engulfing bar as it states in its title is formed when it fully engulfs the previous candle. The engulfing bar can engulf more than one previous candle, but to be considered an engulfing bar, at least one candle must be fully consumed. The bearish engulfing is one of the most important candlestick patterns. This candlestick pattern consists of two bodies: The first body is smaller than the second one, in other words, the second body engulfs the previous one. See the illustration below: This is how a bearish engulfing bar pattern looks like on your charts, this candlestick pattern gives us valuable information about bulls and bears in the market. 17 THE CANDLESTICK TRADING BIBLE In case of a bearish engulfing bar, this pattern tells us that sellers are in control of the market. When this pattern occurs at the end of an uptrend, this indicates that buyers are engulfed by sellers which signals a trend reversal. See the example below: As you can see when this price action pattern occurs in an uptrend, we can anticipate a trend reversal because buyers are not still in control of the market, and sellers are trying to push the market to go down. You can’t trade any bearish candlestick pattern you find on your chart; you will need other technical tools to confirm your entries. 20 THE CANDLESTICK TRADING BIBLE The Doji Candlestick pattern Doji is one of the most important Japanese candlestick patterns, when this candlestick forms, it tells us that the market opens and closes at the same price which means that there is equality and indecision between buyers and sellers, there is no one in control of the market. See the example below: As you can see the opening price is the same as the closing price, this signal means that the market didn’t decide which direction will take. When this pattern occurs in an uptrend or a downtrend, it indicates that the market is likely to reverse. See another example below to learn more: 21 THE CANDLESTICK TRADING BIBLE The chart above shows how the market changed direction after the formation of the Doji candlestick. The market was trending up, that means that buyers were in control of the market. The formation of the Doji candlestick indicates that buyers are unable to keep price higher, and sellers push prices back to the opening price. This is a clear indication that a trend reversal is likely to happen. Remember always that a Doji indicates equality and indecision in the market, you will often find it during periods of resting after big moves higher or lower. When it is found at the bottom or at the top of a trend, it is considered as a sign that a prior trend is losing its strengths. 22 THE CANDLESTICK TRADING BIBLE So if you are already riding that trend it’s time to take profits, it can also be used as an entry signal if it is combined with other technical analysis 25 THE CANDLESTICK TRADING BIBLE The Gravestone Doji The Gravestone Doji is the bearish version of the dragonfly Doji, it is formed when the open and close are the same or about the same price. What differentiates the Gravestone Doji from the dragonfly Doji is the long upper tail. The formation of the long upper tail is an indication that the market is testing a powerful supply or resistance area. See the example below: 26 THE CANDLESTICK TRADING BIBLE The image above illustrates a perfect gravestone Doji. This pattern indicates that while buyers were able to push prices well above the open. Later in the day sellers overwhelmed the market pushing the price back down. This is interpreted as a sign that bulls are losing their momentum and the market is ready for a reversal. See another illustration below: The chart above shows a gravestone Doji at the top of an uptrend, after a period of strong bullish activity. The formation of this candlestick pattern indicates that buyers are no longer in control of the market. For this pattern to be reliable, it must occur near a resistance level. 27 THE CANDLESTICK TRADING BIBLE As a trader, you will need additional information about the placement and context of the gravestone Doji to interpret the signal effectively. This is what i will teach you in the next chapters. 30 THE CANDLESTICK TRADING BIBLE But here, the Doji candle indicated that sellers are struggling to push the market lower. The third bullish candle indicates that buyers took control from sellers, and the market is likely to reverse. This is how professional traders analyze the market based on candlestick patterns, and this is how you will analyze financial markets if you can master the anatomy of candlestick patterns and the psychology behind their formations. 31 THE CANDLESTICK TRADING BIBLE The evening star pattern The evening star pattern is considered as a bearish reversal pattern that usually occurs at the top of an uptrend. The pattern consists of three candlesticks: -The first candle is a bullish candle -The second candle is a small candlestick, it can be bullish or bearish or it can be a Doji or any other candlestick. -The third candle is a large bearish candle. In general, the evening star pattern is the bearish version of the morning star pattern. See the example below: 32 THE CANDLESTICK TRADING BIBLE The first part of an evening star is a bullish candle; this means that bulls are still pushing the market higher. Right now, everything is going all right. The formation of the smaller body shows that buyers are still in control but they are not as powerful as they were. The third bearish candle indicates that the buyer’s domination is over, and a possible bearish trend reversal is likely to happen. See another chart that illustrates how the evening star could represent a significant trend reversal signal. As you can see the market was trending up, the first candle in the pattern indicates a long move up. The second one is a short candle indicating price consolidation and indecision. 35 THE CANDLESTICK TRADING BIBLE This candle forms when sellers push the market lower after the open, but they get rejected by buyers so the market closes higher than the lowest price. See another example below: As you can see the market was trending down, the formation of the hammer (pin bar) was a significant reversal pattern. The long shadow represents the high buying pressure from this point. Sellers was trying to push the market lower, but in that level the buying power was more powerful than the selling pressure which results in a trend reversal. The most important to understand is the psychology behind the formation of this pattern, if you can understand how and why it was 36 THE CANDLESTICK TRADING BIBLE created, you will be able to predict the market direction with high accuracy. We will talk about how to trade this pattern and how to filter this signal in the next chapters. 37 THE CANDLESTICK TRADING BIBLE The shooting star (bearish pin bar) The shooting formation is formed when the open low, and close are roughly the same price, this candle is characterized by a small body and a long upper shadow. It is the bearish version of the hammer. Professional technicians say that the shadow should be twice the length of the real body. See the example below: The illustration above shows us a perfect shooting star with a real small body and an upper long shadow, when this pattern occurs in an uptrend; it indicates a bearish reversal signal. The psychology behind the formation of this pattern is that buyers try to push the market higher, but they got rejected by a selling pressure. 40 THE CANDLESTICK TRADING BIBLE The Harami Pattern (the inside bar) The Harami pattern (pregnant in Japanese) is considered as a reversal and continuation pattern, and it consists of two candlesticks: The first candle is the large candle, it is called the mother candle, followed by a smaller candle which is called the baby. For the Harami pattern to be valid, the second candle should close outside the previous one. This candlestick is considered as a bearish reversal signal when it occurs at the top of an uptrend, and it is a bullish signal when it occurs at the bottom of a downtrend. See an example below: 41 THE CANDLESTICK TRADING BIBLE As you see the smaller body is totally covered by the previous mother candle, don’t bother yourself with the colors, the most important is that the smaller body closes inside of the first bigger candle. The Harami candle tells us that the market is in an indecision period. In other words, the market is consolidating. So, buyers and sellers don’t know what to do, and there is no one in control of the market. When this candlestick pattern happens during an uptrend or a downtrend, it is interpreted as a continuation pattern which gives a good opportunity to join the trend. And if it is occurred at the top of an uptrend or at the bottom of a downtrend, it is considered as a trend reversal signal. Look at another example below: 42 THE CANDLESTICK TRADING BIBLE In the chart above, you can see how the trend direction changes after the Harami pattern formation, the first bullish harami pattern occurred at the bottom of a downtrend, sellers were pushing the market lower, suddenly price starts consolidating, and this indicates that the selling power is no longer in control of the market. The bearish Harami is the opposite of the bullish, this one occurred at the top of an uptrend indicating that buyer’s domination is over and the beginning of a downtrend is possible. When this pattern is created during an uptrend or a downtrend, it indicates a continuation signal with the direction of the market. We will study in details how to trade this pattern either as a reversal pattern or as a continuation pattern in the next chapters. 45 THE CANDLESTICK TRADING BIBLE bearish candle which indicates that buyers are coming to reverse the market direction. If this price action happens near a support level, it indicates that a bearish reversal is likely to happen. The chart above shows us a tweezers bottom that occurs in a downtrend, the bears pushed the market downward on the first session; however, the second session opened where prices closed on the first session and went straight up indicating a reversal buy signal that you can trade if you have other elements that confirm your buying decision. Don’t focus on the name of a candlestick, try to understand the psychology behind its formation, this is the most important. 46 THE CANDLESTICK TRADING BIBLE Because if you can understand why it was formed, you will understand what happened in the market, and you can easily predict the future movement of price. 47 THE CANDLESTICK TRADING BIBLE Candlestick patterns exercise Now i think that you get some information about Japanese candlesticks, you know the anatomy of each candlestick and the psychology behind its formation, let’ take this exercise to test your knowledge and see if you still remember all of the candlesticks we talked about. Look at the chart below and try to find the name of each candlestick number, and the psychology behind its formation. If you can easily identify these candlestick patterns, and you understand why they are formed. You are on the right path. But if you still struggle to identify these patterns, you will have to start learning about them again till you feel like you master them. 50 THE CANDLESTICK TRADING BIBLE 4: Bullish engulfing bar Please, i want you to open your charts, and do this homework over and over again. You will see that with screen time and practice, you will be able to look at your charts, and understand what the candlesticks tell you about the market. Don’t worry about how to enter and exit the market for the moment, take your time and try to master the candlestick patterns discussed in the previous chapters. In the next chapters, i will arm you with techniques that will help you identify the best entry and exit points based on candlestick patterns in combination with technical analysis. Trust me, these price action strategies will turn you from a beginner trader who struggles to make money in the market into a profitable price action trader. 51 THE CANDLESTICK TRADING BIBLE The market structure One of the most important skill that you need as a trader is the ability to read the market structure, it is a critical skill that will allow you to use the right price action strategies in the right market condition. You are not going to trade all the markets the same way; you need to study how the markets move, and how traders behave in the market. The market structure is the study of the market behavior. And if you can master this skill, when you open your chart, you will be able to answer these important questions: What the crowds are doing? Who is in control of the market buyers or sellers? What is the right time and place to enter or to exit the market and when you need to stay away? Through your price action analysis, you will experience three types of markets, trending markets, ranging markets, and choppy markets. In this chapter, you will learn how to identify every market, and how to trade it. 1-Trending markets Trending markets are simply characterized by a repeating pattern of higher highs and higher low in an up-trending market, and lower high and lower low in a down trending market. See the example below: 52 THE CANDLESTICK TRADING BIBLE As you can see in the example above, the market is making series of higher highs and higher lows which indicates that the market is up trending. You don’t need indicators to decide if it is bullish or bearish just a visual observation of price action is quite enough to get an idea about the market trend. Look another example of a downtrend market. 55 THE CANDLESTICK TRADING BIBLE of buying. But as you can see the market is making two different moves, the first move is an impulsive move, and the second one is a pullback or a retracement move. (corrective move) Professional traders understand how trending markets move; they always buy at the beginning of an impulsive move and take profits at the end of it. This is the reason why the market makes an impulsive move in the direction of the trend and retraces before it makes another impulsive move. If you are aware of how trending markets move, you will know that the best place to buy is at the beginning of an impulsive move, traders who buy an uptrend market at the beginning of a retracement move, they got caught by professional traders, and they don’t understand why the market hint their stop loss before moving in the predicted direction. See another example of a bearish trend. 56 THE CANDLESTICK TRADING BIBLE The illustration above shows a downtrend market, as you can see the best trading decision is to sell the market at the beginning of an impulsive move. If you try to sell in the retracement move, you will be trapped by professional traders, and you will lose your trade. Now we know how to identify downtrends and uptrends, and how to differentiate between an impulsive move, and a retracement move. This is very important for you as a price action trader to know. BUT the most important question is how to identify the beginning of the impulsive move to enter the market in the right time with professional traders, and avoid being trapped by the retracement move? 57 THE CANDLESTICK TRADING BIBLE To predict the beginning of the impulsive move in a trending market, you have to master drawing support and resistance levels. So, what are support and resistance levels and how to draw them on our charts? this is what we will see in the next chapter. 60 THE CANDLESTICK TRADING BIBLE The market makes an impulsive move. If you understand how price action act in a trending market, you will predict with high accuracy when the next impulsive move will begin. Another way to catch the beginning of an impulsive move is by drawing trend lines. This is another technical skill that you have to learn if you want to identify key linear support and resistance level. Let me explain you first what do trend lines mean? Quite often when the market is on the move making new swing highs and lows, price will tend to respect a linear level which is identified as a trend line. Bullish markets will tend to create a linear support level, and bearish markets will form a linear resistance level. 61 THE CANDLESTICK TRADING BIBLE How to draw trend lines? To draw a quality trend line, you will need to find at least 2 minimum swing points, and simply connect them with each other. The levels must be clear, don’t try to force a trend line. Don’t use smaller time frame to draw trend lines, use always the 4H and the daily time frames to find obvious trend lines. We will try to focus right now on how to draw them in a trending markets, our purpose is to identify the beginning of impulsive moves in a trending market. In the next chapter, i will explain you in detail how to trade trend lines in combination with our price action trading setups. See an example of how to draw trend lines in a downtrend market. As you can see the market respects the trend line, and when price approach it, the market reverse and continue in the same direction. 62 THE CANDLESTICK TRADING BIBLE When the market moves this way, trend lines help us to anticipate the next impulsive move with the direction of the market. Look at another example of an uptrend market. As you can see the market respects the trend line, and by drawing it the right way, we can easily predict the next movement upward. This is all what we can say about trending markets, i think it’s clear and simple, now what i want you to do is to open your charts and try to find trending markets. Find previous swing points (support and resistance).and try to find trend lines as well. This exercise will help you understand how trending markets move. And how to predict high probability entries in the market. 65 THE CANDLESTICK TRADING BIBLE As you can see, the market is moving horizontally, in this case the best buying opportunities occur at the support level. And the best selling opportunities occur at the resistance level. The second way of trading ranging markets is by waiting for the breakout from either the support level or the resistance level. When the market is ranging, no one knows what is going to happen, we don’t know who is going to be in control of the market, this is why you have to pay attention to the boundaries, but when one of the players decide to take control of the market, we will see a breakout of the support or the resistance level. The breakout means that the ranging period is over, and the beginning of a new trend will take place... See the example below: 66 THE CANDLESTICK TRADING BIBLE As you can see the market was trading between support and resistance levels, and suddenly the price broke out of the resistance level, this indicates that the beginning of a trend is likely to happen. So the best way to enter is after the breakout. It’s important to remember that range boundaries are often overshot, giving the illusion a breakout is occurring, this can be very deceptive, and it does trap a lot of traders who positioned into the breakout. The third way to trade ranging markets is to wait for a pullback after the breakout of the support or the resistance level. The pullback is another chance to join the trend for traders who didn’t enter in the breakout. See the example below: 67 THE CANDLESTICK TRADING BIBLE As you can see in the chart above, the market was ranging, price breaks out of the resistance level to indicate the end of the ranging period, and the beginning of a new trend. After the breakout, the market comes back to retest the resistance level that becomes support before it goes up. The pullback is your second chance to join the buyers if you miss the breakout. But Pullbacks don’t always occur after every breakout, when it occurs, it represents a great opportunity with a good risk to reward ratio. What you have to remember is that a ranging market moves horizontally between the support and the resistance level. These are the key levels that you have to focus on. The breakout of the support or the resistance level indicates that the ranging period is over, so you have to make sure that the breakout is real to join the new trend safely. 70 THE CANDLESTICK TRADING BIBLE Time frames and top down analysis As a price action trader, your primary time frame is the 1H, the 4H and the daily. Price action works on bigger time frames, if you try to trade pin bars or engulfing bars on the 5-minute time frame, you will lose your money, because there is lot of noise on smaller time frames, and the market will generate lot of false signals because of the hard battle between the bears and bulls. Besides, there is no successful price action trader who focuses on one- time frame to analyze his charts, maybe you have heard of the term top and down analysis which means to begin with bigger time frames to get the big picture, and then you switch to the smaller one to decide whether to buy or to sell the market. Let’s say you want to trade the 4h chart, you have to look at the weekly chart first, and then the daily chart, if the weekly and the daily charts analysis align with the 4h chart, you can then take your trading decision. And if you want to trade the 1H chart, you have to look at the daily chart first. This is a critical step to do as a price action trader, because this will help you avoid low probability trading setups, and it will allow you to stay focused on high probability price action signals. Through our top down analysis, we always start with the bigger time frame, and we look for to gather the following information: -The most important support and resistance levels: these areas represent turning points in the market, if you can identify them on the weekly chart, you will know what is going to happen when the price approaches these levels on the 4h chart. So you will decide either to buy, to sell or to ignore the signals you get from the market. 71 THE CANDLESTICK TRADING BIBLE -The market structure: the weekly analysis will help you identify if the market is trending up or down, or it is ranging, or choppy market. In general, you will know what the big investors are doing. And you will try to find a way to follow them on the smaller time frames using my price action strategies. -The previous candle: the last candle on the weekly chart is important, because it tells us what happens during a week, and it provides us with valuable information about the future market move. When you identify these points using the weekly chart, you can now move to the daily chart or the 4h chart and try to gather information such as: -The market condition: what the market is doing on the 4h time frame, is it trending up or down, is it ranging, or is it a choppy market. - what are the most important key levels on the 4h or the daily time frame: this could be support and resistance, supply and demand areas, trend lines…. -price action signal: a candlestick patterns that will provide you with a signal to buy or short the market. This could be a pin bar, an engulfing bar or an inside bar… Let me give you an example to help you understand why it is important to adopt the top down analysis concept in your trading method and what is going to happen if you don’t look at the bigger time frame before switching to your primary chart. Look at the illustration below: 72 THE CANDLESTICK TRADING BIBLE As you can see in this weekly chart above, we have gathered two important points that will help us decide what to do on the daily time frame. The first point is that the market approaches to an important weekly resistance level that will represent a hot point in the market. The second information is the rejection from this key resistance level, as you can see the price was rejected immediately when it approaches the level, this indicates that there are sellers there and they are willing to short the market. What confirms our analysis is the formation of the inside bar false breakout patterns that indicates a reversal. Now let’s switch to the daily time frame to see what is going on in the market: 75 THE CANDLESTICK TRADING BIBLE As you can see in the chart above, price are at a weekly resistance level, buyers were rejected twice from this level which indicates that the market is at a hot a point and it is likely to reverse. What you can do as a price action trader is to switch to the daily time frame to look for a selling opportunity. If you can find a price action setup near the weekly resistance level on the daily time frame, this is going to be a high probability setup to take into consideration. See the example below: 76 THE CANDLESTICK TRADING BIBLE The daily chart above confirms our weekly analysis, as you can see; there is a clear bearish signal near the weekly resistance level. The pin bar was rejected from that level, and there is also the formation of an inside bar false breakout. This is a clear indication of a trend change. See what happened next: 77 THE CANDLESTICK TRADING BIBLE The example above shows that counter trend works if it is well mastered, it is a contrarian approach that requires experience, so if you are a beginner, i highly recommend you to stick with the trend, try to practice as much as you can the top down analysis concept with the trend, and when you master trading with the trend, you can then move to trade high probability counter trend setups. There are many approaches used to time the market turns and plan trades, the most of these approaches lead to greater confusion and lack of confidence in the results. Keeping the analysis simple is most often the best way to go, and top down analysis is one of the easiest approaches that i recommend to master if you want to trade the right way. What you have to do right now is to open your charts and try to practice what you learnt in this chapter. 80 THE CANDLESTICK TRADING BIBLE These levels are the best zones where you can buy and sell the market. 3-What is the best signal to enter the market? The best signal to enter the market means the right time to execute your trade. And this is what you will learn in the next chapter. 81 THE CANDLESTICK TRADING BIBLE The pin bar candlestick pattern strategy The pin bar candlestick is one of the most famous Japanese candlesticks; it is widely used by price action traders to determine reversal points in the market. In this section, you will learn in detail how to identify potential pin bar signals, and the conditions needed for high probability setups. A pin bar is a chart candlestick, it is characterized by a very long tail that shows rejection and indicates that the market will move in the opposite direction. The area between the open and close is called the real body, typically all pin bars have a very small real body and a long shadow. A Bullish pin bar is known for its lower wicks, and the bearish one is characterized by long upper wicks, the color of the candlestick is not quite important, however, bullish candles with white real body are more powerful than candles with a real black body. On the other hand, a bearish pin bars with black real bodies are more important than the ones with white real bodies. See how pin bars look like below: 82 THE CANDLESTICK TRADING BIBLE How to identify pin bar candlestick setups? To be honest, quality price action setups don’t exist in the market, because you will see that sometimes you can find a high probability setup, you feel very excited about it and you take your trade with confidence, but at the end, you will be frustrated because the signal fails for unknown reasons. That happens a couple of times, because the market doesn’t move due to pin bar formations, what moves the market is the law of supply and demand. Let me give you an example, if you identify a quality pin bar candle near a support key level in an uptrend market, this is a powerful buying signal to take, you shouldn’t ignore it, but if the amount of money that buyers put in this trade is less than the amount of money that sellers 85 THE CANDLESTICK TRADING BIBLE As you can see in the chart above, bullish pin bars that were formed in line with the uptrend work, and they should be taken into consideration. But the bearish ones that were formed against the trend should be ignored. -The anatomy of a pin bar is important as well, you have to make sure that the candlestick is a pin bar by looking at the distance between the real body and the tail. Pin bars with longer tails are more powerful. The Psychology behind the pin bar candle formation: Pin bars are formed when prices are rejected, this rejection doesn’t indicate a reversal signal, because this price action setup can form everywhere in your chart. The most important areas to watch when trading pin bars are major key levels such as: support and resistance, supply and demand zones, and moving averages. The formation of this candlestick chart pattern in these levels give a clear idea about what happens in the market. If the rejection was near a support level for example, this is an obvious indication that the bulls are more powerful, and they are willing to push the market to go upward. See the chart below: 86 THE CANDLESTICK TRADING BIBLE If the formation of this candlestick occurs near a resistance level, it indicates that the bears reject prices, and prevent the bulls from breaking this level. So, this means that sellers are willing to push the market downward. See the chart below: 87 THE CANDLESTICK TRADING BIBLE If you understand the psychology behind this price action pattern formation, you will be able to predict what is likely to happen in the future, and you will make good trades based on high probability pin bar signals. 90 THE CANDLESTICK TRADING BIBLE As you can see in the chart above, the market was trending down, using the 21 moving averages helps us to identify dynamic resistance levels, and high probability pin bar setups. See another chart below: 91 THE CANDLESTICK TRADING BIBLE The 4-hour chart above illustrates how the 21-moving average could help us find key points in the market. When prices approach the moving average, the buying pressure takes place in the market, and the price goes up. The pin bar signal is clear on the chart, because the trend is bullish, the price action setup has a bullish anatomy as well, and the rejection from the 21-moving average is a confirmation signal to buy the market. 92 THE CANDLESTICK TRADING BIBLE Trading tactics When we identify the trend, (uptrend or downtrend) and the level (support or resistance). And we find a pin bar near these levels in line with the direction of the trend. The second step is to know how to enter the market based on this candlestick pattern. According to my experience, there are different entry options when it comes to trading pin bars; it all depends on the candle anatomy, the market conditions, and your money management strategy. 1-The aggressive entry option: this method consists of entering the market immediately after the pin bar closes without waiting for a confirmation. This strategy will help you catch the move from the beginning, because sometimes the price goes higher after the close of the pin bar, and if you are not in the market, the trade will leave without you. See the example below: 95 THE CANDLESTICK TRADING BIBLE One of the drawbacks of this entry option is that the market sometimes doesn’t retrace to 50% of the range bar, which will make you feel frustrated because the market will move to the profit target without you. There is no wrong or right entry option, the both work great, but with screen time and experience, you will be able to decide whether to trade aggressively or conservatively. 96 THE CANDLESTICK TRADING BIBLE Trading pin bars with confluence Confluence happens when many technical indicators generate the same signal, this trading concept is used by price action traders to filter their entry points and spot high probability signals in the market. It doesn’t matter if you are beginner or advanced trader, trading with confluence is a must, because it will help you focus on quality setups rather than quantity, and it will enhance tremendously your trading performance. Confluence means combination or conjunction, it is a situation in which two or more things join or come together, for example, if we are looking for a pin bar signal, we need to find other factors of confluence to confirm our entry; we are not going to take any pin bar that we find on our chart. Factors of confluence: The trend: it is one of the most important factor of confluence, this is the first thing that most successful traders look for on their charts, you can’t trade any setup without identifying if it is in line with the direction of the market or not. A bearish pin bar in a downtrend is more powerful signal than the one in a range-bound market. Support and resistance levels and supply and demand areas: these major levels have a significant importance in the market, because all big participants watch these specific areas. Moving averages: i personally use the 8 and 21 moving average, this technical trading tool acts as dynamic support and resistance, and it is a very important factor of confluence in trending markets. Fibonacci retracement tool: I use the 61% and 50 % Fibonacci retracement to find the most powerful areas in the market. 97 THE CANDLESTICK TRADING BIBLE Trend lines: drawing these lines on your charts give us an idea about the market direction and help us find the most important reversal points in the market. When you are analyzing your chart, you are not obligated to find all these levels to determine whether the trade is valid or not. If you can find just one or two factors of confluence that come up together with a good pin bar setup, this is quite enough to make a profitable trade. For example: an obvious pin bar signal near support or resistance level in line with the direction of the market. See the illustration below: