INVESTMENT GUIDE: Charts provide a wealth of ideas for trading the Analysis of Japanese candlestick patterns is one method we can use in. Japanese candlesticks can be used to create price charts in any speculatively-traded market, including spot forex, spot commodities, commodity. Here's a real forex world example:In this scenario, you can see that there is resistance The most common types of Japanese candlestick patterns are. 10 MOST TRADED FOREX PAIRS SYMBOLS

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In my experience, you will have much more success taking candlestick patterns like this than with naked candlestick trading. Note: Before I get tons of comments on this, I realize that many naked candlestick traders consider support and resistance part of the naked candlestick trading technique.

Using support and resistance can improve the results of almost any trading strategy, but it takes skill to pick good levels and patience to wait for patterns to form at those levels. Candlestick Signals and Divergence Of all of the Japanese candlestick charting techniques that I know, trading candlestick patterns in combination with MACD divergence has to be my favorite. I certainly use this technique more than any other. The trick with this technique is to only take divergence entries after a decent downtrend or uptrend — one that has a good chance of being exhausted.

In the image above, you can see a healthy downtrend. While price was making lower lows, the MACD histogram made higher lows. This could be a sign that momentum is leaving the downtrend. At the same time, a nice bullish engulfing pattern appeared, further building the case that a reversal was about to happen. Hidden divergence works the opposite way. In a downtrend, hidden divergence is measured off of the highs and is a trend continuation signal — not a reversal signal. In my experience, you do not need to wait for a healthy trend to take a hidden divergence trade, although the setups that occur within strong trends usually will naturally have a higher strike rate.

In the image above, you can see another healthy downtrend. This time, as price is making lower highs, the MACD line and histogram are making higher highs. This could be a sign that momentum is coming into the trend. Adding to the case of a trend continuation, you can see a couple of good bearish engulfing patterns that occurred after nice retracements. Note: For a more in-depth explanation of the difference between regular divergence and hidden divergence, check out my article on how to trade hidden divergence.

Sometimes, trend retracements move more sideways than up or down, so it takes a little bit of experience to get a good feel for choosing quality candlestick patterns within these retracements. Fibonacci Retracement Trading One of the most often used Japanese candlestick charting techniques is to combine candlestick patterns with Fibonacci retracements.

You may have already seen my article about Fibonacci retracement trading. In the image above, you can see a nice swing low in price which the Fibonacci retracement was drawn off of. One advantage to this technique, similar to trading hidden divergence, is that you are taking trades in the direction of the overall trend — as opposed to betting against the trend with a reversal trade. However, like trading hidden divergence, it takes practice to choose quality candlestick patterns that form within the retracement of a trend.

In fact, this was the first technique that I combined with candlestick trading that actually worked for me. The idea is that, if price is overbought, a bearish reversal is more likely to happen. If price is oversold, a bullish reversal is more likely to happen. In the image above, you can see a strong bullish swing in price. At the top, a nice shooting star candlestick formed.

Adding to the quality of the trade, price was overbought above the 80 level when the shooting star formed, according to the stochastic oscillator. The default MT4 settings for the stochastic oscillator are 5,3,3. When trading divergence, 8,3,3 or 5,3,3 typically works well.

For determining when price is overbought or oversold, 14,3,3 or 8,3,3 typically works well. Many traders use the stochastic oscillator to determine when price is overbought or oversold. However, the RSI is also very useful for this purpose, if not more useful. As before, the shooting star formed as price was overbought the RSI was above the 80 level.

The 80 and 20 levels represent extremes in price. There is indecision between buyers and sellers. It means the prior trend is losing its strength and no one is in control of the market. Most often or not, if you see this after a strong upward or downward trend, the market is likely to reverse. We discuss any Japanese candlestick charting techniques in our trading room. Trading the Doji Candlestick Put simply, if the previous candles are bullish, you can anticipate the next one will be a bearish reversal.

Alternatively, if the previous candles are bearish then the doji will probably form a bullish reversal. As you can see in the example below, there was a strong bullish upward trend. Which means the buyers are in control of the market. After four candles the buyers were no longer able to keep pushing the price higher, indecision hit in the form of a doji, the sellers came in and we see the wash in price moving down. We often see stocks massively gap up after positive news or vice versa due to negative news.

In some cases, this could be due to a merger or positive results in a cancer trial. More often than not, these spikes happen right out of the gate on the market open and last for about 30 minutes. This was due to news regarding positive clinical trials for treating leukemia. Because typically anything that moves rapidly upwards, the market will correct it.

In this instance, the doji was the signal that a reversal may be taking place. This is where you would enter your short position. We typically see late day fades in stocks that slowly grind up throughout the day. And like clockwork, they wash somewhere between pm and pm. What I like so much about late day fades is their ease of predictability. So, I simply do a quick scan of stocks that moved up, draw my support and resistance lines and short it if the indicators are right.

Then you can see the doji forming at around pm followed by the wash. Sometimes after hours negative news hits, investors get nervous, panic and sell off their positions. Or, the wash on open simply could be due to short sellers covering their positions in a stock that gapped up pre-market.

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