CANDLESTICKS

The ability to read candlesticks is a very useful skill for the analysis of Forex markets. It is worthwhile learning the significance of candlestick formations and to apply that knowledge to your trading. Years ago I spent some months learning wilderness survival skills, which heavily consisted of tracking and nature observation (it’s a hobby/interest of mine; I’m actually a city boy). It is amazing what you can learn about an animal, or a person, by analyzing their tracks (foot prints). Other than some obvious facts (such as sex, size, weight, direction) you can also learn some intimate details about the one being tracked (i.e. psychological). The science & art of tracking isn’t just about being able to follow, which is the more basic aspect of tracking, but more importantly it is about anticipating where the prey is going. Candlesticks are footprints in time showing where the market has been and can indicate the psychology of the market. Knowing how to read the candles can help you to “track” the prey of the market, anticipate its’ intentions of how it will behave, and ultimately where it will go. It is not my intention to give a full explanation of the use of Candlesticks for trading the Forex markets (I am contemplating writing an eBook about this subject for later). You will find a useful introduction about this subject in the “Forex Classics” eBook. The purpose of discussing candlesticks here is to ensure you are impressed with the intention to use them in conjunction with “Sailing” techniques, but also to briefly introduce you to some “fractal” perspectives. Steve Nison has done a super job of introducing this skill to us western

traders; he has made a significant contribution to the world of trading. Definitely take the time to read his books some day. Candlesticks has been taught in many books, mostly about stocks & commodities, however I’ll stand on a soapbox and proclaim that what they teach is not entirely applicable to Forex trading. I am surprised to find “Forex” books teaching basically a parroted version of what is frequently taught in stocks & commodities books; it seems like they “copied & pasted” the information without much thought on the topic. Simply put, much of what is written about this subject is wrong for Forex traders!!! There are two reasons what they teach you is wrong. Reason #1 – Typically the diagrams shown are of “daily candles”. Because the stocks and commodities markets open and close each day there are often price gaps between the close price of one candle and the open price of the next candle. Thus many diagrams of those books show disjointed candle bodies. The Forex market, however, is a 24 hour market thus the open price of a Daily candle typically matches (usually exactly or within a couple of pips) the close price of the previous day’s candle. The only exception to this is the weekend, so a Monday candle may open with a price different from Friday’s candle. In some charting packages, for smaller candle scales (i.e. 5 minute or 1 minute candles) you’ll see these close/open price gaps, but in other charting packages you’ll see that there is no gap (depending upon how the charting package deals with last ticks before close and first tick after open). The bottom line is that you’ll never (or extremely rarely) see candlestick formations as illustrated in those books. I’m surprised that some “Forex” books even show this rather inaccurate information (I won’t mention any titles of books because I don’t want any law suits for saying something bad about them). Reason #2 – The psychological implications and “meanings” of various candlestick patters are inaccurate for the “Forex” market. Stocks and commodities are essentially a one-directional market – if prices go up then things are considered to be good, but if prices go down then things are considered to be bad. Candlestick patterns have definitions based upon optimism / pessimism of a particular stock or commodity showing the prevailing fear / greed of market sentiment. The Forex market, however, is a bi-directional market. Essentially you can either trade up or down without it having any particular significance to you (unlike a stock that if it goes down to zero you’ll panic because now your stock is worthless). What I’m getting at is that the implied significance of some candlestick patterns (as taught for stocks 

or commodities) is a little bit wrong for the Forex market (however many other patterns are still right). Even though there are these above stated inaccuracies you can still benefit from reading those stocks & commodities books (even those “Forex” books). Just keep the above points in mind to help you to modify what you learn about candlesticks from those books so that they can be applied to Forex trading. I think that one day I’ll write my own version of candlesticks for Forex (please don’t hound me for this; I’ll get around to it when I can). As I just stated, use the candlestick techniques you can learn from “Forex Classics” or other books (just modify them). Later you’ll get my version of how to use candlesticks for Forex. The rest of this section I just want to bring your attention to a couple of topics related to candlesticks, and to give you a different perspective on them. I won’t review the definitions of the candles discussed here because you should have read about them by now in “Forex Classics”. If you see a “doji” candle, or a very small candle, particular with short wicks (best), on your Daily charts, or even Weekly charts, then if you zoom into smaller scales you’ll often notice that this “doji” is a consolidation pattern. When the consolidation pattern breaks out, and if it is a market reversal, then it will typically form a “morning/evening star” formation. When most people are just getting excited over seeing a “morning/evening star” formation you can be already on board on the trade because you recognized a breakout pattern earlier than they did (Imagine that! You can get in at just about the start of the trend – most people would envy you). There is also a technique called “Teeny Netless Candles” taught later in this eBook to help you with these types of situations. When you see a “tweezer top/bottom” formation realize that this is usually a “double top/bottom” trend reversal pattern if you zoom your perspective into smaller chart timescales. That is why they usually signal a reversal (there are additional reasons, but we’ll discuss those in my candlestick eBook). Of course there are many other candlestick formations, but those are the only ones that I really wanted to bring your attention to in this eBook because they are “money makers”. Watch for them on the larger charts then zoom into smaller charts to find the opportunity they signal to you. Fibonacci swings are one of my favorite techniques (as you probably realize by now having read my eBooks). I tried explaining to you a bit about spotting

hidden Fibonacci swings in my eBook “Forex Surfing”, but I’ll touch upon this again to clarify this point for you. Contained within candles are hidden Fibonacci swings. Here is how to spot them when they occur so that you can potentially benefit from them. Take a look at the following diagram. The candles on the chart represent… well candles of course. The black line represents a simplification of the typical price movement. The black line is staggered from the candles just so that you can more clearly see each. Basically the price moved up from the low, reached the high of the first candle (swing), then went down to the low of the second candle (retracement), and then went up to the high of the second candle (extension). If you were to zoom into a smaller scale chart you would typically see this Fibonacci swing clearly. So let’s say you see something like this on your bigger scale charts. The second candles are “still in formation” (not completed yet): 

Could you potentially be seeing a Fibonacci swing before it is fulfilled? Well maybe (no guarantees), but it might be worth looking into. Zoom into a smaller scale chart to see what it looks like, and of course look at the bigger scale charts to see resistance/support levels. Remember that all the details visible in smaller charts are summarized in a single candle, or just a few candles, on the bigger charts. Knowing this you can look at the bigger candles (and candle patterns) to recognize potential trading opportunities that are better perceived on the smaller charts. Keep the idea in mind that candles are footprints of the market; learn to track and stock this prey.