The Candlestick Trading Bible

Introduction

The Candlestick trading bible is a powerful trading system invented by Homma Munehisa, the father of candlestick chart patterns.
Homma Munehisa was the most successful trader in history, known as the God of markets, amassing over $10 billion in today’s dollar.
The trading bible is consistently updated to create a profitable, easy, and time-efficient trading system.
It combines Japanese candlestick patterns with technical analysis.
Master the method to trade any financial market.
Learning Japanese candlesticks is like learning a new language for understanding financial markets and making informed decisions.

Overview

The eBook covers these sections:

Candlesticks Anatomy: Understanding the psychology behind candlestick bodies.
Candlestick Patterns: Recognizing important patterns and their market indications.
Market Structure: Identifying and trading in trending, ranging, and choppy markets, drawing support, resistance, and trendlines.
Time Frames and Top Down Analysis: Analyzing markets using a top-down approach.
Trading Strategies and Tactics: Trading using pin bar, engulfing bar, inside bar, and inside bar false breakout strategies with trade examples.
Money Management: Creating a risk control plan.

History of Candlesticks

Candlesticks have been used in Japan since the 17th century, predating similar charts in the Western world.
Rice trading was established in Japan in 1654, followed by gold, silver, and rapeseed oil.
Munehisa Homma (Sokyu Honma), a rice trader, tracked price action and understood the role of emotion in price setting, forming the basis of candlestick analysis.
He gained respect and was promoted to Samurai status.
The Japanese kept candlesticks hidden from the Western world until the 1980s when global banks and financial institutions shared the knowledge.
The widespread use of PCs also helped make charting easier.
In the late 1980s, Western analysts like Michael Feeny and Steve Nison introduced candlesticks to London professionals and published works on candlestick reversal patterns.
Candlesticks have since become a standard analysis template.
Candlesticks are important because they visually represent market activity, providing information about the open, high, low, and close prices.
They can be used alone or with technical analysis tools like moving averages, momentum oscillators, Dow Theory, or Elliot wave theory.
Candlestick analysis helps understand fear, greed, and hope, showing buyer-seller interactions.
Candlesticks offer more clarity and additional signals compared to bar charts.
They are used by professional traders, banks, and hedge funds to understand market movements and make informed decisions.

What is a Candlestick?

Japanese candlesticks use the open, high, low, and close prices for a chosen time frame.
If the close is above the open, the candlestick is bullish (market is rising), typically displayed as white.
If the close is below the open, the candlestick is bearish (market is falling), typically displayed as black.
The filled part of the candlestick is the real body; thin lines above and below are shadows.
The top of the upper shadow is the high; the bottom of the lower shadow is the low.
Long bodies indicate strong buying or selling pressure.
Short bodies indicate little buying or selling activity.
Upper shadows signify the session high; lower shadows signify the session low.
Long shadows indicate trading action occurred far from the open and close; short shadows indicate trading action near the open and close.
A longer upper shadow and short lower shadow suggest buyers initially pushed prices higher, but sellers drove prices back down.
A long lower shadow and short upper shadow suggest sellers initially forced prices lower, but buyers drove prices back up.

Candlestick Patterns

Candlestick patterns are simple, easy to identify, and profitable setups with a high predictive value.
Losing trades are part of trading; there is no 100% winning system.
Candlestick patterns are the language of the market, helping traders understand market dynamics and behavior.
The focus should be on the anatomy of the pattern and the psychology behind its formation.

The Engulfing Bar Candlestick Pattern

The engulfing bar fully engulfs the previous candle(s), with at least one candle fully consumed.
A bearish engulfing pattern occurs when a smaller body is followed by a larger body that engulfs it, indicating sellers are in control.
When found at the end of an uptrend, it signals a trend reversal.
Additional technical tools are needed to confirm entries.
A bullish engulfing bar consists of a small body followed by an engulfing candle, indicating buyers will take control.
In an uptrend, it indicates continuation; at the end of a downtrend, it’s a powerful reversal signal.
The color of the bodies is less important than the engulfing action.
Additional factors of confluence are needed to decide whether the pattern is worth trading.

The Doji Candlestick Pattern

Doji patterns occur when the market opens and closes at the same price, indicating equality and indecision between buyers and sellers.
When found in an uptrend or downtrend, it indicates a likely reversal.
A Doji signifies equality and indecision, often during resting periods after big moves.
At the top or bottom of a trend, it signals the prior trend is losing strength.
It can be a sign to take profits or can be used as an entry signal with other technical analysis.

The Dragonfly Doji Pattern

The Dragonfly Doji is a bullish pattern formed when the open, high, and close are the same or about the same price, characterized by a long lower tail.
The long lower tail shows buyers' resistance and push to raise the market.
It suggests supply and demand are nearing balance, and the trend may be turning.
It indicates a bullish reversal signal.
Identifying this pattern can help visually see support and demand locations.
Other indicators and tools are needed to determine high probability signals.

The Gravestone Doji

The Gravestone Doji is the bearish version of the Dragonfly Doji, formed when the open and close are the same or about the same price, with a long upper tail.
The long upper tail indicates the market is testing a powerful supply or resistance area.
While buyers were able to push prices well above the open, sellers overwhelmed the market, pushing the price back down.
This is interpreted as bulls losing momentum and the market being ready for a reversal.
For reliability, it must occur near a resistance level.

The Morning Star

The morning star pattern is considered a bullish reversal pattern that occurs at the bottom of a downtrend and consists of three candlesticks:
- The first candlestick is bearish, indicating that sellers are still in charge of the market.
- The second candle is a small one, which represents that sellers are in control, but they don’t push the market much lower, and this candle can be bullish or bearish.
- The third candle is a bullish candlestick that gapped up on the open and closed above the midpoint of the body of the first day; this candlestick holds a significant trend reversal signal.
The morning star pattern shows how buyers took control of the market from sellers, when this pattern occurs at the bottom of a downtrend near a support level, it is interpreted as a powerful trend reversal signal.
The pattern occurred at an obvious bearish trend. The first candle confirmed the seller’s domination, and the second one produces indecision in the market, the second candle could be a Doji, or any other candle.
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.

The Evening Star

The evening star pattern is considered 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.
The first part of an evening star is a bullish candle; this means that bulls are still pushing the market higher.
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
The second one is a short candle indicating price consolidation and indecision.
The trend that created the first long bullish candlestick is losing momentum. The final candlestick gaping lower than the previous candlestick indicating a confirmation of the reversal and the beginning of a new trend down.

The Hammer pin Bar

The Hammer candlestick is created when the open high and close are roughly the same price; it is also characterized by a long lower shadow that indicates a bullish rejection from buyers and their intention to push the market higher.
The hammer is a reversal candlestick pattern when it occurs at the bottom of a downtrend.
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.
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 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.
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.
When this candlestick forms near a resistance level, it should be taken as a high probability setup.

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.
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.
When this pattern is created during an uptrend or a downtrend, it indicates a continuation signal with the direction of the market.

The Tweezers tops and bottoms

The tweezers top formation is considered as a bearish reversal pattern seen at the top of an uptrend, and the tweezers bottom formation is interpreted as a bullish reversal pattern seen at the bottom of a downtrend.
The tweezers top formation consists of two candlesticks: The first one is a bullish candlestick followed by a bearish candlestick.
And the tweezers bottom formation consists of two candlesticks as well: The first candle is bearish followed by a bullish candlestick.
The tweezers bottom is the bullish version of the tweezers top.
The tweezers top occurs during an uptrend when buyers push the price higher, this gave us the impression that the market is still going up, but sellers surprised buyers by pushing the market lower and close down the open of the bullish candle.
This price action pattern indicates a bullish trend reversal, and we can trade it if we can combine this signal with other technical tools.
The tweezers bottom happens during a downtrend, when sellers push the market lower, we feel that everything is going all right, but the next session price closes above or roughly at the same price of the first 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.
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.

Candlestick patters Exercise

Exercise to test knowledge on candlestick patterns.
Identify 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.
Another exercise to check candlestick patterns knowledge.
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.
In the next chapters, you will be armed with techniques that will help you identify the best entry and exit points based on candlestick patterns in combination with technical analysis.
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.

The market structure

One of the most important skills 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.

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.
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.
Trending markets are easy to identify, don’t try to complicate your analysis, use your brain and see what the market is doing.
If it is doing series of higher highs and higher low, it is simply an uptrend market; conversely, if it is making series of lower highs and lower low, it is obviously a downtrend market.
According to statistics, trends are estimated to occur 30% of the time, so while they are in motion, you've got to know how to take advantage of them.
To determine whether a market is trending or not, you have to use bigger time frames such the 4H, the daily or the weekly time frame. Never try to use smaller time frames to determine the market structure.

How to trade trending markets

If you can identify a trending market, it will be easy for you to trade it, if it is a bullish market, you will look for a buying opportunity, because you have to trade with the trend, and if the market is bearish, you have to look for a selling opportunity.
Trending markets are characterized by two important moves, the first move is called, the impulsive move, and the second one is called the retracement 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.
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.
If you try to sell in the retracement move, you will be trapped by professional traders, and you will lose your trade.

How to identify the beginning of the impulsive move?

To predict the beginning of the impulsive move in a trending market, you have to master drawing support and resistance levels.

Support and Resistance levels

Support and resistance are proven areas where buyers and sellers find some sort of equilibrium, they are major turning points in the market.
Support and resistance levels are formed when price reverses and change direction, and price will often respect these support and resistance levels, in other words, they tend to contain price movement until of course price breaks through them.
In trending markets, support and resistance are formed from swing points. in an uptrend the previous swing point acts as a support level, and in a downtrend the old swing point acts as a resistance level.
By drawing a support level in an uptrend market, we can predict when the next impulsive move will take place.
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.

How to draw trend lines

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.
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.
As you can see the market respects the trend line, and when price approach it, the market reverse and continue in the same direction.
When the market moves this way, trend lines help us to anticipate the next impulsive move with the direction of the market.

The Ranging Market

Ranging markets are pretty straight forward, they are often called sideways markets, because their neutral nature makes them appear to drift to the right, horizontally.
When the market makes a series of higher highs and higher lows, we can say that the market is trending up. But when it stops making these consecutive peaks, we say that the market is ranging.
A ranging market moves in a horizontal form, where buyers and sellers just keep knocking price back and forth between the support and the resistance level.
The difference between trending markets and ranging markets is that trending markets tend to move by forming a pattern of higher high and higher lows in case of an uptrend, and higher low and lower low in case of a downtrend.
But ranging markets tend to move horizontally between key support and resistance levels. Your understanding of the difference between the both markets will help you better use the right price action strategies in the right market conditions.

Trading Ranging markets

Trading ranging markets is completely different from trading trending markets, because when the market is ranging, it creates equilibrium, buyers are equal to sellers, and there is no one in control.
This will generally continue until the range structures broke out , and a trending condition start to organize. The best buying and selling opportunities occur at key support and resistance levels.
There are three ways to trade ranging markets:
by waiting for price to approach support or resistance level then you can buy at key support level and sell at key resistance level
waiting for the breakout from either the support level or the resistance level. The breakout means that the ranging period is over, and the beginning of a new trend will take place…
wait for a pullback after the breakout of the support or the resistance level.
The pullback is your second chance to join the trend for traders who didn’t enter in the breakout.
What you have to remember is that a ranging market moves horizontally between the support and the resistance level.

Choppy markets

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.
If you miss the breakout, wait for the pullback. when it occurs, don’t hesitate to enter the market.
When you are trading ranging markets, always make sure that the market is worth trading, if you feel like you can’t identify the boundaries (support and resistance). this is a clear indication of a choppy market.
In Forex, choppy markets are those which have no clear directions, when you open your chart, and you find a lot of noise, you can’t even decide if the market is ranging, or trending. You have to know that you are watching a choppy market.
This type of markets can make you feel very emotional and doubt your trading strategies as it starts to drop in performance. The best way to determine if a market is choppy is just by zooming out on the daily chart and taking in the bigger picture.
After some training, screen time and experience, you will easily be able to identify if a market is ranging or it is a choppy market. If a market is choppy, in my opinion, it is not worth trading, if you try to trade it, you will give back your profits shortly after big winners, because markets often consolidate after making big moves.

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. Though 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.
- 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…

Trading strategies and tactics

The first aspect is the market trends: you know how to identify the market trend using multiple time frames analysis. You know how to differentiate between trending markets, and range bounds markets. And you understand how each market moves.
The second aspect is the level: you learnt how to draw support and resistance, and how to draw trend lines, this skill will help you better enter the market in the right time.
The third aspect is the signals: you have seen different candlestick patterns, you understand the psychology behind its formation, and the message they send you. These three aspects which are the trend, the level, and the signal are what we will use in our trading approach to make money trading any financial market.
I mean that when you open a chart, you will try to answer three important questions:
1-What the market is doing? Is it trending, consolidating, or is it a choppy market? If it is trending, you know how to identify if it is an uptrend or a downtrend. If it is a ranging market, you will see that it is trading horizontally between two boundaries. And if it is a choppy market, you close your chart and you stay away.
* What are the most powerful levels in this market? If the market is trending up or down, or it is ranging, you will try to find the most important support and resistance levels. These levels are the best zones where you can buy and sell the market.
* What is the best signal to enter the market? The best signal to enter the market means the right time to execute your trade.

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.
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.

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.
If the signal fails, it doesn’t mean that your analysis is wrong, or pin bars don’t work, it is just because the market didn’t validate your decision, therefore, you accept your loss, and you look for another opportunity.
To determine whether or not a pin bar is worth trading, this price action signal should respect the following criteria:
- The pin bar formed in bigger time frames such as the 4 hour or daily time frame should be taken into consideration, because if you look at smaller time frames, you can easily spot lot of pin bar signals, these setups should be ignored, because smaller time frames generate lot of false signals.
- The pin bar formed in line with the direction of the market is more powerful than the one which is formed against the trend.
- * 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.
  Understanding the psychology behind this price action pattern formation will make you successful.

How to identify pin bar candlestick setups

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.
- 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.
- 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.

Trading the pin bar candlestick with the trend

If you are a beginner trader, I highly recommend you to stick with the trend, because pin bars that occur in trending markets offer good trading opportunities with high risk/reward ratio. When you master trading it with the rend, you can then move to trade range-bounds markets or even counter-trends.
This strategy is simple, you start by identifying a clear uptrend or downtrend, and you wait for a pin bar to occur after a pullback to support or resistance level.
The formation of the pin bar indicates the end of the retracement move, and the beginning of the impulsive move at the resistance level in line with the downtrend.
If you are in this situation, you can use the 21-moving average which will act as a dynamic support in an uptrend market and a dynamic resistance in a downtrend market.

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.

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.
your profit target will be the next support level in case of a downtrend. These three elements are quite enough for you to find high probability entries in the market.
There should be three important reasons:
The trend.
The level.
The signal

The conservative entry option

this strategy consists of entering the market after 50% of the range bar retracement. This strategy sometimes will work and it gives you more than 5:1 risk/reward ratio, and sometimes the market will leave 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.

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.
Factors of confluence: The trend, Support and resistance levels and supply and demand areas, Moving averages, Fibonacci retracement tool, Trend lines.
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.

Pin Bar trades examples

I will give you some trading examples to help you understand how to trade the pin bar candlestick pattern with the trend. and how to use the confluence concept to confirm your entries.
-The market is trending down that indicates that sellers are in control of the market, so if you decide to sell the market near the resistance level, all probabilities will be in your favor.
If you are able to identify this setup, and you understand the psychology behind it, there should be no reason not to get into the position.
What confirms trade entry:
1. The downtrend
2. The formation of the pin bar near the Resistance level which indicates the end of the pullback and the beginning of 2 new movement downward
3. The rejection of the pin bar from the resistance level, and from the 21-moving average:
4. the is rejection from the 50% Fibonacci retracement level which is considered to be one of the most powerful key levels in the market
Trading high probability setups

Trading pin bars in range-bound markets

We can say that a market is ranging when prices don’t make any higher high and higher low and start trading horizontally between a definable level of support and a definable level of resistance.
Once I see that the market changes its behavior, i have to change my tactics and adopt a trading strategy that fits this new market condition.
To confirm a ranging market, i have to look for at least two touches of support level, and two touches of resistance level, and once i have identified the range, then it becomes very simple to trade it by going long when prices reaches the support level and going short when prices approach the resistance level.
As you see, as prices approach the key support or resistance level, we have an opportunity to buy or sell the market; we need just to wait for a clear price action setup such as a pin bar candlestick. Trading from major key support and resistance levels is the easiest way to make money trading range-bounds markets, don’t never try to trade any setup if it is not strongly rejected from these areas.
Wait for a clear price action setup such as a pin bar candlestick.
Key support or resistance level, we have an opportunity to buy or sell the market
Opportunities that you can trade successfully:
- The first one is a pin bar rejected from the support level, you can place a buy order after the pin bar closes, or you wait for the market to touches the 50% of the pin bar range. Your stop loss should be placed above the support level, and your profit target must be placed near the resistance level.
- The second trading opportunity occurs near the support level, you place a buy order after the close of the pin bar, and your stop loss should be below the support level; your profit target is the next resistance level.
- The third setup is an obvious buying opportunity; as you can see the market was rejected from the support level and formed a pin bar to inform us that buyers are still there, and the market is likely to bounce from the support level.
Once i see that the market changes its behavior, i have to change my tactics and adopt a trading strategy that fits this new market condition.
The formation of an obvious pin bar indicates a high probability signal. This is how professional traders trade ranging markets based on this price action